HP
Annual Report 2009

2009

AnnuAl RepoRt

CEO letter

Dear Fellow Stockholders,

In 2009, the global economy experienced the 
worst recession in a generation. At HP, all of our 
work to reduce our cost base and to make it more 
variable proved immensely valuable. Beginning 
in our first fiscal quarter, we had to address a 
rapidly deteriorating demand environment across 
our product portfolio. We set a goal of controlling 
discretionary spending, while keeping the muscle 
of the organization intact and maintaining forward 
progress on our core strategy. At the same time, we 
focused on executing the integration of the services 
businesses acquired from Electronic Data Systems 
Corporation (EDS) in August 2008, ultimately 
rebranding the business HP Enterprise Services 
within the HP Enterprise Business. Although there 
is still much work to do, we enter fiscal 2010 in a 
stronger competitive position.

All of our efforts resulted in a solid performance 
relative to the industry and the economic 
environment:

•	Net	revenue	of	$114.6	billion	

•	GAAP	operating	profit	of	$10.1	billion	

•	GAAP	diluted	earnings	per	share	of	$3.14	

•	Non-GAAP	operating	profit	of	$12.6	billion*

•	Non-GAAP	diluted	earnings	per	share	of	$3.85*

A solid performance by a more agile company
Over the last five years, HP has become a much 
more agile company, able to adapt and benefit 
from changing market conditions. In fiscal 2009, 
we gained share in key markets and continued to 
invest for growth in research and development, 
acquisitions, and sales coverage. 

Perhaps nowhere has this agility been more evident 
than	in	our	Personal	Systems	Group	(PSG).	In	the	
first	quarter,	PSG	revenue	declined	19	percent	from	
the prior year, but the business was able to adjust 
quickly to the new environment, rationalizing an 
operating model that encompasses the industry’s 
largest PC supply chain and tens of thousands  
of resellers and retailers around the world.  
PSG	delivered	solid	margins	and	continued	to	 
drive innovation into the market with a steady  
rollout	of	high-performing,	well-designed,	and	 
well-received	products.	Over	the	course	of	the	 
year,	PSG	not	only	reaffirmed	its	position	as	the	
worldwide leader in PC market share, but also 
captured the #1 position in the U.S. enterprise 
market	with	double-digit	share	gains.	

In	the	Imaging	and	Printing	Group	(IPG),	the	decline	
in	demand	hit	especially	hard	early	in	the	year.	IPG	
has made significant progress in its cost structure, 
inventory management, and overall operational 
rigor. Operationally, it is in much better shape as it 
enters	fiscal	2010.	IPG	is	gaining	traction	in	retail	
photo kiosks, which is an exciting opportunity. The 
kiosks generally stay installed for many years and 
generate significant supplies usage. Managed Print 
Services is another important area that is getting a 
lot of focus. The revenues from services contracts 
are	longer-term	as	well	as	more	stable,	and	over	the	
last	five	years	we’ve	grown	this	into	a	multi-billion	
dollar	business.	In	commercial	printing,	the	analog-
to-digital	shift	is	occurring	at	the	rate	of	roughly	
200 billion pages a year, and we are leveraging 
our technology to accelerate and profit from the 
transition. 

In the HP Enterprise Business (EB), our product 
businesses also had to adapt to the market 
environment across the portfolio of software, 
servers, and storage, while continuing to deliver for 
our	customers.	Our	industry-standard	x86	servers	
performed particularly well. We gained market 
share	and	enjoyed	a	strong	rollout	of	our	new	G6	
server, which offers improved performance, a very 
attractive return on investment, and meaningful 
innovations in heating, cooling, and energy use. 

Since	2004,	we	have	invested	more	than	 
$17	billion	in	research	and	development	 
and	$20	billion	in	acquisitions	to	build	the	best,	
most comprehensive portfolio in the industry.  
The recent announcement of our intent to acquire 
3Com	Corporation	exemplifies	HP’s	forward-
looking	focus.	3Com	has	outstanding	technology	
that complements our existing offerings, and, 
when completed, the acquisition will expand HP’s 
presence in the important networking segment. 

The biggest story in EB, however, was in Services. 
Throughout fiscal 2009, we benefited from the more 
stable revenues associated with Services, which 
has now become our most profitable segment. 
We worked hard on the integration of EDS, 
retained 199 of the 200 largest EDS accounts, 
and increased customer satisfaction. Today, we 
face the marketplace as one company with a more 
competitive cost structure and a significant number 
of new customers. Services is well positioned to 
compete, win, and grow. 

A future of converged infrastructure
Increasingly, we expect that traditional technology 
silos such as servers, storage, networking, and 
software will begin to converge into infrastructure 
that is optimized to meet customer needs. The 
converged infrastructure will be differentiated 
with	value-added	software	and	delivered	through	
services	any	way	the	customer	wants	it—in-house,	
outsourced,	cloud-based,	or	through	a	hybrid	
environment that balances cost, security, and 
performance across multiple models. 

A disciplined multi-year strategy
At	HP,	we’ve	been	executing	a	disciplined,	multi-
year strategy, building the company through 
careful analysis of our operations and portfolio, the 
competitive	landscape,	and	the	long-term	forces	
shaping our industry and the world. This process 
began	with	the	build-out	of	our	industry-standard	
hardware	offerings	into	scaled,	market-leading	
positions from the desktop to the data center. 
We then pioneered the area of automation and 
management software to optimize and differentiate 
our hardware in the marketplace. And then, with 
EDS,	we	acquired	a	best-in-class,	globally	scaled	
service provider to meet customer needs more 
effectively as technology is increasingly delivered 
through a services model. 

No	other	company	is	as	well	positioned	as	HP	to	
drive this evolution in the marketplace or deliver 
on its potential. HP’s supply chain is the largest 
in the industry and provides tremendous leverage 
across our hardware portfolio. For example, the 
supply base shared between our industry standard 
servers and PCs has helped HP to change the server 
marketplace, introducing better performance at a 
lower cost. Industry standard servers are now the 
fastest-growing	server	segment,	and	HP	leads	the	
category. We expect to replicate that success in 
other data center adjacencies such as storage and 
networking. In addition, HP can use its software 
competencies to develop innovative solutions on top 
of	industry-standard	hardware,	deploy	them	broadly,	
and use the power of our supply chain to capture 
share	in	higher-margin	categories.	

The power of information
This transition towards a converged infrastructure 
is exciting for our future. However, the greater 
opportunity lies in our ability to project the 
intelligence of this computing capability from the 
data center out into the world to help meet the 
demands of a rapidly evolving global community.

By	2025,	worldwide	population	is	expected	to	
increase by 20 percent. The population in the 
world’s cities will grow by more than 1 billion 
people—the equivalent of adding a Beijing every 
other month. The “global middle class” is expected 
to	grow	from	440	million	to	1.3	billion	people	
over the next few decades, as wireless and Internet 
connectivity continue to level the playing field. In 
the background of all of this, we are witnessing 
an explosion in information. The total amount of 
information is estimated to double every four years, 
and digital content doubles every 18 months. 

Throughout history, every few centuries, we 
harness a new source of power. First it was fire, 
later electricity and oil. Today, it is information. 
At HP, we’ve helped lead a revolution in the way 
information is created, captured, stored, processed, 
and	shared.	Open,	industry-standard	computing	
has helped free data from complex, proprietary 
mainframes, and it has democratized information 
technology in a way that is more affordable, 
powerful, and flexible. Software transforms the vast 
sea of digital content into usable information that is 

delivered as a service and transmitted to interactive, 
always-connected	devices	in	real	time.	Getting	the	
right information to the right place at the right time 
is	a	powerful	way	to	drive	better	decision-making,	
better resource utilization, and extreme efficiencies. 

HP is working with customers in areas such as 
education, healthcare, and energy to meet the 
changing needs of the global community today. And 
in HP Labs, we’re working on the future. Innovations 
like	nano-scale	sensors,	breakthrough	software	
for analytics and knowledge discovery, and data 
centers with zero net environmental impact will 
be the building blocks of tomorrow’s sustainable 
society. We are using our technology to find a better 
answer for how we meet the needs of a world with 
growing demands and limited resources. 

Building a better world
We are also helping build a better world through 
social investment and environmental innovation. 
HP’s	Office	of	Global	Social	Innovation	is	working	
to transform teaching and learning to foster the next 
generation of entrepreneurs and innovators. We’re 
integrating technology into the learning experience 
and providing professional development. From 
technology grants in East Palo Alto to building a 
university	e-infrastructure	in	sub-Saharan	Africa,	
we’re helping level the playing field for participation 
in the global economy. Around the world, our efforts 
are supported by tens of thousands of employees 
who volunteer in their local communities and donate, 
in conjunction with matching grants, to the causes 
they care about most.

Another important priority is doing our part to 
preserve and protect the environment. Our strategic 
framework includes reducing the carbon footprint 
of	HP-owned	operations	and	of	our	supply	chain,	
reducing the environmental impact of our products 
and services, developing solutions and services that 
will reduce the footprint of the rest of the economy, 
and advocating for effective public policy. We also 
announced last year that by the end of 2011, we 
will reduce the energy consumption and associated 
greenhouse gas emissions of all HP products by  
40	percent	compared	to	2005	levels.	These	actions	
were recently recognized by Newsweek, which 
ranked	HP	#1	among	the	500	largest	corporations	
in the United States based on environmental impact, 
green policies, and social responsibility.

In closing
Even as HP successfully managed through a 
challenging fiscal 2009, we have continued to 
build for the future and prepare our company for 
growth. Today, our market leadership extends 
across the industry’s broadest portfolio of hardware, 
software, and services. Our scale and reach provide 
meaningful and sustainable competitive advantages 
that we are ready to capitalize on in fiscal 2010. In 
the years ahead, we are well positioned to lead the 
evolution of our industry and to create extraordinary 
opportunities for our customers, our stockholders, our 
people, and the world around us.

Sincerely,

Mark V. Hurd 
Chairman, Chief Executive Officer and President

*  Fiscal year 2009 non-GAAP financial information excludes  

$1.7 billion of adjustments on an after-tax basis, or $0.71 per  
diluted share, related primarily to the amortization of purchased 
intangible assets, restructuring charges, acquisition-related charges, and 
in-process research and development charges. HP’s management uses 
non-GAAP operating profit and non-GAAP diluted earnings per share 
(EPS) to evaluate and forecast HP’s performance before gains, losses, or 
other charges that are considered by HP’s management to be outside of 
HP’s core business segment operating results. HP believes that presenting 
non-GAAP operating profit and non-GAAP diluted EPS, in addition to 
GAAP operating profit and GAAP diluted EPS, provides investors with 
greater transparency to the information used by HP’s management 
in its financial and operational decision-making. HP further believes 
that providing this additional non-GAAP information helps investors 
understand HP’s operating performance and evaluate the efficacy of 
the methodology and information used by management to evaluate and 
measure such performance. This additional non-GAAP information is 
not intended to be considered in isolation or as a substitute for GAAP 
operating profit and GAAP diluted EPS. 

HP members of the board

Marc L. Andreessen
Director since 2009 

Rajiv L. Gupta
Director since 2009

Joel Z. Hyatt
Director	since	2007	

Robert L. Ryan
Director	since	2004	

Mr. Hyatt has served as Vice 
Chairman of Current Media, 
LLC, a cable and satellite 
television company, since July 
2009. Previously, Mr. Hyatt 
served as Chief Executive 
Officer of Current Media from 
September 2002 until July 
2009. From September 1998 
to	June	2003,	Mr.	Hyatt	was	
a Lecturer in Entrepreneurship 
at the Stanford University 
Graduate	School	of	Business.	
Prior to that, Mr. Hyatt 
was the founder and Chief 
Executive Officer of Hyatt 
Legal Plans, Inc., a provider 
of	employer-sponsored	group	
legal plans.

John R. Joyce
Director	since	2007	

Mr. Joyce has served as 
a Managing Director at 
Silver Lake, a private equity 
firm,	since	July	2005.	From	
1975	to	July	2005,	he	
served in multiple roles for 
IBM, a global technology 
firm, including Senior 
Vice	President	and	Group	
Executive	of	the	IBM	Global	
Services division; Chief 
Financial Officer; President, 
IBM Asia Pacific; and Vice 
President and Controller for 
IBM’s global operations. 
Mr. Joyce also is a director 
of	Gartner,	Inc.;	Avago	
Technologies Limited; Sabre, 
Inc.; Serena Software, Inc.; 
and Intelsat, Ltd.

Mr. Ryan has served as HP’s 
Lead Independent Director 
since September 2008. 
He served as Senior Vice 
President and Chief Financial 
Officer of Medtronic, Inc., a 
medical technology company, 
from	1993	until	his	retirement	
in	May	2005.	Mr.	Ryan	 
also	is	a	director	of	General	
Mills, Inc.; The Black and 
Decker Corporation; and 
Citigroup, Inc. 

Lucille S. Salhany
Director since 2002 

Ms. Salhany has served as 
President and Chief Executive 
Officer of JHMedia, a 
consulting company, since 
1997.	Since	2003,	she	has	
been a partner and director 
of Echo Bridge Entertainment, 
an independent film 
distribution company.

G. Kennedy Thompson
Director	since	2006	

Mr. Thompson has served 
as an Executive Advisor to 
Aquiline Capital Partners 
LLC, a private equity firm, 
since June 2009. Previously, 
Mr. Thompson served as 
Chairman of Wachovia 
Corporation, a financial 
services company, from 
February	2003	until	June	
2008. Mr. Thompson also 
served as Chief Executive 
Officer of Wachovia from 
2000 until June 2008 and 
as President from 1999 until 
June 2008. 

Mr.	Andreessen	is	co-founder	
and a general partner of 
Andreessen Horowitz, a 
venture capital firm founded 
in	July	2009,	and	co-founder	
and	Chairman	of	Ning,	Inc.,	
an online platform founded 
in	late	2004	for	people	
to create their own social 
networks. From September 
1999	to	July	2007,	 
Mr. Andreessen served as 
Chairman of Opsware, Inc., 
a software company that he 
co-founded.	Mr.	Andreessen	
also is a director of eBay Inc.

Lawrence T. Babbio, Jr.
Director since 2002 

Mr. Babbio has served as a 
Senior Advisor to Warburg 
Pincus, a private equity firm, 
since	June	2007.	Previously,	
Mr. Babbio served as Vice 
Chairman and President of 
Verizon Communications, 
Inc., a telecommunications 
company, from 2000 until his 
retirement	in	April	2007.	

Sari M. Baldauf
Director	since	2006	

Ms. Baldauf served as 
Executive Vice President and 
General	Manager	of	the	
Networks	business	group	
of	Nokia	Corporation,	a	
communications company, 
from July 1998 until February 
2005.	She	previously	held	
various	positions	at	Nokia	
since	1983.	Ms.	Baldauf	 
also serves as a director at 
Fortum	Oyj,	Daimler	AG,	
F-Secure	Corporation	and	
CapMan Plc.

Mr.	Gupta	has	served	as	
a	Senior	Advisor	to	New	
Mountain Capital, LLC, a 
private equity firm, since July 
2009.	Previously,	Mr.	Gupta	
served as Chairman and 
Chief Executive Officer of 
Rohm and Haas Company, 
a worldwide producer of 
specialty materials, from 
October 1999 to April 2009. 
Mr.	Gupta	occupied	various	
other positions at Rohm 
and Haas since joining the 
company	in	1971,	including	
Vice Chairman from 1998 
to 1999; Director of the 
Electronic Materials business 
from	1996	to	1999;	and	
Vice President and Regional 
Director	of	the	Asia-Pacific	
Region	from	1993	to	1998.	
Mr.	Gupta	also	is	a	director	
of	The	Vanguard	Group	and	
Tyco International Ltd.

John H. Hammergren
Director	since	2005	

Mr. Hammergren has served 
as Chairman of McKesson 
Corporation, a healthcare 
services and information 
technology company, since 
July 2002 and as President 
and Chief Executive Officer of 
McKesson since April 2001. 
Mr. Hammergren also is a 
director	of	Nadro,	S.A.	de	
C.V. (Mexico).

Mark V. Hurd
Director	since	2005	

Mr. Hurd has served as 
Chairman of HP since 
September	2006	and	as	
Chief Executive Officer, 
President and a member of 
the	Board	since	April	2005.	
Prior to that, he served as 
Chief Executive Officer 
of	NCR	Corporation,	a	
technology company, from 
March	2003	to	March	2005	
and as President from July 
2001	to	March	2005.	 
Mr. Hurd also is a director  
of	News	Corporation.

HP executive team

Mark V. Hurd 
Chairman, Chief Executive 
Officer and President 

Ann M. Livermore  
Executive Vice President,  
HP Enterprise Business

Peter J. Bocian 
Executive Vice President and 
Chief Administrative Officer

Randall D. Mott 
Executive Vice President and 
Chief Information Officer 

R. Todd Bradley 
Executive Vice President, 
Personal	Systems	Group

Marcela Perez de Alonso 
Executive Vice President, 
Human Resources

Michael J. Holston 
Executive Vice President, 
General	Counsel	and	
Secretary 

Shane V. Robison 
Executive Vice President  
and Chief Strategy and 
Technology Officer

Vyomesh I. Joshi  
Executive Vice President, 
Imaging	and	Printing	Group

Catherine A. Lesjak 
Executive Vice President  
and Chief Financial Officer

Forward-looking 
statements

This	document	contains	forward-looking	statements	that	involve	risks,	uncertainties,	and	
assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the 
results	of	Hewlett-Packard	Company	and	its	consolidated	subsidiaries	could	differ	materially	from	
those	expressed	or	implied	by	such	forward-looking	statements	and	assumptions.	All	statements	
other	than	statements	of	historical	fact	are	statements	that	could	be	deemed	forward-looking	
statements, including but not limited to any projections of revenue, margins, expenses, tax 
provisions, earnings, cash flows, benefit obligations, share repurchases, acquisition synergies, 
currency exchange rates, or other financial items; any statements of the plans, strategies, and 
objectives of management for future operations, including the execution of cost reduction 
programs and restructuring plans; any statements concerning expected development, performance 
or market share relating to products or services; any statements regarding future economic 
conditions or performance; any statements regarding pending investigations, claims, or disputes; 
any statements of expectation or belief; and any statements of assumptions underlying any of the 
foregoing. Risks, uncertainties, and assumptions include macroeconomic and geopolitical trends 
and events; the execution and performance of contracts by HP and its customers, suppliers, and 
partners; the challenge of managing asset levels, including inventory; the difficulty of aligning 
expense	levels	with	revenue	changes;	assumptions	related	to	pension	and	other	post-retirement	
costs; expectations and assumptions relating to the execution and timing of cost reduction 
programs and restructuring plans; the resolution of pending investigations, claims, and  
disputes; and other risks that are described in HP’s filings with the Securities and Exchange 
Commission,	including	but	not	limited	to	HP’s	Annual	Report	on	Form	10-K	for	the	fiscal	year	
ended	October	31,	2009,	which	is	included	as	part	of	this	document.	HP	assumes	no	obligation	
and	does	not	intend	to	update	these	forward-looking	statements.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

(cid:2) ANNUAL  REPORT PURSUANT TO  SECTION 13  OR 15(d) OF  THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended October 31, 2009

Or

(cid:3)

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from 

 to 

Commission file number 1-4423

HEWLETT-PACKARD COMPANY

(Exact name of registrant as specified  in its  charter)

Delaware
(State or other jurisdiction  of
incorporation or organization)

3000 Hanover Street, Palo Alto, California
(Address of principal executive offices)

94-1081436
(I.R.S. employer
identification  no.)

94304
(Zip code)

Registrant’s telephone number, including area  code: (650) 857-1501

Securities registered pursuant to Section  12(b) of  the  Act:

Title of each class

Name of each exchange on which registered

Common stock, par value $0.01 per share

New York Stock  Exchange

Securities registered pursuant to Section 12(g)  of  the Act:
None

Indicate  by check mark if the registrant is a well-known seasoned  issuer as defined in Rule 405 of the Securities Act. Yes (cid:2) No (cid:3)

Indicate  by check mark if the registrant is not required to file reports  pursuant to Section 13 or Section 15(d) of the Act.

Yes (cid:3) No (cid:2)

Indicate  by check mark whether the registrant (1) has filed all  reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or  for such shorter period that the registrant was required to file such reports),
and (2) has been  subject to such filing requirements for the past  90 days. Yes (cid:2) No (cid:3)

Indicate  by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months  (or
for such shorter  period that the registrant was required to submit and post such files). Yes (cid:2) No (cid:3)

Indicate  by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and  will

not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K.  (cid:2)

Indicate  by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer’’ and ‘‘smaller reporting company’’ in Rule 12b-2  of
the Exchange Act. (Check one):
Large accelerated filer (cid:2)

Smaller reporting company  (cid:3)

Accelerated filer (cid:3)

Non-accelerated filer (cid:3)
(Do not check if a smaller
reporting company)

Indicate  by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:3) No (cid:2)

The  aggregate market value of the registrant’s common stock held by non-affiliates was $85,982,273,000 based on the last sale

price of  common  stock on April 30, 2009.

The  number of shares of HP common stock outstanding as of  November 30, 2009 was 2,364,168,918 shares.

DOCUMENT DESCRIPTION

DOCUMENTS INCORPORATED BY  REFERENCE

Portions of the  Registrant’s proxy statement related to its 2010 Annual Meeting of Stockholders to be filed
pursuant to Regulation 14A within 120 days after Registrant’s  fiscal year end of October 31, 2009 are incorporated
by reference into Part III of this Report.

10-K PART

III

Hewlett-Packard Company

Form 10-K

For the Fiscal Year Ended October 31, 2009

Table of Contents

PART I
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . .
Item 4.

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer

Item 6.
Item 7.

Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion  and  Analysis of Financial Condition  and Results of

Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative  Disclosures about  Market Risk . . . . . . . . . . . . . . . . . .
Financial Statements and  Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial
Item 9.

Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART III

Item 10. Directors, Executive Officers  and Corporate Governance . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11.
Security Ownership of Certain  Beneficial  Owners and Management and Related
Item 12.

Item 13.
Item 14.

Item 15.

Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and  Related Transactions, and Director  Independence . . . . . .
Principal Accounting Fees  and  Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART IV
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

3
15
31
31
32
32

33
35

36
74
76

163
163
163

164
164

164
165
165

166

Forward-Looking Statements

This  Annual Report on Form 10-K, including ‘‘Management’s Discussion and  Analysis of Financial
Condition and Results of Operations’’  in Item 7, contains forward-looking statements that involve risks,
uncertainties and assumptions. If the risks or uncertainties ever materialize  or  the assumptions  prove
incorrect, the results of Hewlett-Packard  Company and  its  consolidated subsidiaries (‘‘HP’’)  may differ
materially from those expressed or implied  by  such forward-looking statements and assumptions. All
statements other than statements of historical fact  are  statements that could be deemed  forward-looking
statements, including but not limited to  any projections of revenue,  margins,  expenses, tax provisions,
earnings, cash flows, benefit obligations,  share repurchases, acquisition synergies, currency  exchange  rates or
other financial items; any statements of  the plans, strategies  and objectives of  management for  future
operations, including the execution of cost  reduction programs and restructuring  plans; any statements
concerning expected development, performance or market  share relating to products or services; any
statements regarding future economic conditions  or performance; any statements  regarding pending
investigations, claims or disputes; any statements  of  expectation or belief;  and any statements of assumptions
underlying any of the foregoing. Risks,  uncertainties  and assumptions  include macroeconomic  and
geopolitical trends and events; the execution and performance  of contracts by HP  and its customers,
suppliers and partners; the challenge of  managing asset levels,  including  inventory; the  difficulty of aligning
expense levels with revenue changes; assumptions  related to pension and other  post-retirement costs;
expectations and assumptions relating to  the execution  and timing of cost reduction programs  and
restructuring plans; the resolution of pending investigations, claims  and disputes;  and other risks that are
described herein, including but not limited to the  items discussed in ‘‘Risk Factors’’  in  Item  1A of this
report, and that are otherwise described  or  updated from time  to time in HP’s Securities and Exchange
Commission reports. HP assumes no obligation and does  not  intend to update  these forward-looking
statements.

ITEM 1. Business.

PART I

HP is a leading global provider of products, technologies, software, solutions and services to
individual consumers, small- and medium-sized  businesses (‘‘SMBs’’) and large enterprises,  including
customers in the government, health  and  education  sectors.  Our offerings span:

(cid:129) multi-vendor customer services, including infrastructure technology and business process

outsourcing, technology support and maintenance, application development  and support  services
and consulting and integration services;

(cid:129) enterprise information technology  infrastructure, including enterprise storage and server

technology, networking products and resources, and software that  optimizes business technology
investments;

(cid:129) personal computing and other access devices;  and

(cid:129) imaging and printing-related products and services.

HP was incorporated in 1947 under the laws of  the State of California as  the successor to a

partnership founded in 1939 by William R. Hewlett and David Packard. Effective in May 1998, we
changed our state of incorporation from California to Delaware.

HP Products and Services; Segment  Information

During  fiscal 2009, our operations were organized  into seven business  segments: Services,
Enterprise Storage and Servers (‘‘ESS’’), HP  Software,  the Personal  Systems  Group (‘‘PSG’’), the
Imaging and Printing Group (‘‘IPG’’), HP  Financial  Services (‘‘HPFS’’),  and Corporate Investments.

3

Services, ESS and HP Software are reported collectively as a broader HP  Enterprise Business (formerly
the Technology Solutions Group). While  the HP Enterprise  Business is not  an operating segment, we
sometimes provide financial data aggregating the segments  within it  in order to provide a
supplementary view of our business. In  each of the past  three fiscal years, notebooks, desktops and
printing supplies each accounted for more  than 10% of our consolidated  net revenue.  In fiscal  2009,
infrastructure technology outsourcing also accounted for more than 10%  of  our  consolidated  net
revenue, and in fiscal 2007 industry standard servers also accounted for more  than 10%  of our
consolidated net revenue.

A summary of our net revenue, earnings from operations and  assets for our segments  and business

units is found in Note 19 to the Consolidated  Financial Statements in Item 8, which is incorporated
herein by reference. A discussion of factors potentially  affecting our operations is  set forth in ‘‘Risk
Factors’’ in Item 1A, which is incorporated herein  by  reference.

HP Enterprise Business

The HP Enterprise Business provides servers, storage,  software and  information technology (‘‘IT’’)

services that enable enterprise and midmarket business customers  to  better manage  their current IT
environments and transform IT into a  business enabler. HP Enterprise Business products  and services
help accelerate growth, minimize risk and  reduce costs  to  optimize the business value of customers’ IT
investments. Companies around the globe  leverage HP’s infrastructure solutions to deploy next
generation data centers and address  business challenges ranging from compliance to business
continuity. The HP Enterprise Business’s  modular IT systems  and  services  are primarily standards-
based and feature differentiated technologies in  areas including power  and  cooling, unified
management, security, virtualization  and  automation.  Each of the three financial reporting segments
within the HP Enterprise Business are described in  detail below.

Services

Services, formerly HP Services, was renamed after the  reorganization of the business units
subsequent to the acquisition of Electronic Data Systems Corporation  (‘‘EDS’’) in  August 2008.
Services provides consulting, outsourcing  and technology  services across  infrastructure, applications and
business process domains. Services delivers to its clients  by  leveraging investments  in consulting and
support professionals, infrastructure technology, applications, standardized methodologies, and  global
supply and delivery. It is divided into four main business units:  infrastructure  technology outsourcing,
applications services, business process  outsourcing and technology services.

Infrastructure Technology Outsourcing.

Infrastructure technology outsourcing delivers

comprehensive services that streamline and optimize our  clients’ infrastructure  to  efficiently enhance
performance, reduce costs, mitigate risk  and  enable business change. These services encompass the data
center and the workplace (desktop); network  and  communications; and security, compliance and
business continuity. We also offer a set  of  managed services, providing a cross-section of our broader
infrastructure services for smaller discrete  engagements.

Application Services. Applications services help clients revitalize  and  manage  their applications
assets through flexible, project-based, consulting services and longer-term outsourcing contracts. These
full lifecycle services encompass application development,  testing, modernization, system integration,
maintenance and management. Applications projects open doors to new infrastructure technology
outsourcing and business process outsourcing  opportunities and represent attractive cross-selling
opportunities to current HP clients.

Business Process Outsourcing. Business process outsourcing is powered by  a platform of underlying

infrastructure technology, applications  and  standardized methodologies and is supplemented by IT

4

experience and in-depth, industry-specific knowledge. These services encompass both industry-specific
and cross-industry solutions. Our cross-industry  solutions  include a broad  array  of enterprise shared
services, customer relationship management services,  financial process management services and
administrative services.

Technology Services. HP provides consulting and support services, as well as warranty support
across HP’s product lines. HP specializes  in keeping technology running with  mission critical services,
converged infrastructure services, networking services,  data center transformation services and
infrastructure services for storage, server and unified communication environments. HP’s technology
services offerings are available in the form of service  contracts,  pre-packaged offerings (HP Care Pack
services) or on an individual basis.

Enterprise Storage and Servers

The server market continues to shift towards standards-based architectures as  proprietary hardware
and  operating systems are replaced by industry standard server platforms that typically  offer compelling
price and performance advantages by  leveraging standards-based operating  systems and microprocessor
designs. At the same time, critical business functions continue  to  demand scalability and reliability. By
providing a broad portfolio of storage  and server solutions, ESS aims to optimize the  combined product
solutions required  by different customers and provide solutions for  a wide range  of operating
environments, spanning both the enterprise  and the SMB markets.  ESS provides  storage  and server
products in a number of categories.

Industry Standard Servers.

Industry standard servers include primarily entry-level and mid-range
ProLiant servers, which run primarily Windows(cid:4),(1) Linux and Novell operating systems and leverage
Intel Corporation (‘‘Intel’’) and Advanced  Micro  Devices (‘‘AMD’’) processors. The business spans a
range of product lines that include pedestal-tower servers,  density-optimized rack servers  and HP’s
BladeSystem family of server blades.  In  fiscal 2009,  HP’s industry standard server business continued to
lead the industry in terms of units shipped and factory revenue.  HP also has a leadership position in
server blades, the fastest growing segment of the  market.

Business Critical Systems. Business critical systems include Itanium(cid:4)(2)-based Integrity servers
running on the HP-UX, Windows(cid:4), Linux, OpenVMS and NonStop  operating systems,  including the
high-end Superdome servers and fault-tolerant Integrity NonStop  servers. Business critical  systems also
include the Reduced Instruction Set  Computing (‘‘RISC’’)-based servers  with the HP  9000 line  running
on the HP-UX operating system, HP  AlphaServers running on both Tru64 UNIX(cid:4)(3) and OpenVMS,
and MIPs-based NonStop servers. During 2009, we continued to transition all business critical systems
platforms to Itanium-based servers.

Storage. HP’s StorageWorks offerings include entry-level, mid-range and high-end arrays, storage
area  networks, network attached storage, storage management  software and virtualization technologies,
as well as tape drives, tape libraries and optical archival storage.

HP Software

HP Software is a leading provider of enterprise and service-provider  software and  services.  Our

portfolio consists of:

Enterprise IT management software. Enterprise IT management solutions, including  support and
professional services, allow customers to manage IT infrastructure, operations, applications, IT services,

(1) Windows(cid:4) is a registered trademark of Microsoft  Corporation.
Itanium(cid:4) is a registered trademark of Intel Corporation.
(2)
(3) UNIX(cid:4) is a registered trademark of The Open Group.

5

and business processes. These solutions also include tools to automate data center operations  and IT
processes. We market them as the HP  business technology optimization  suite,  and we deliver them  in
the form of traditional software licenses and,  in some cases, via a software-as-a-service  distribution
model.

Information management and business  intelligence solutions. Our information management and
business intelligence solutions include  information data strategy, enterprise data warehousing, data
integration, data protection, archiving, compliance, e-discovery  and records  management products.
These solutions enable businesses to extract more value from their structured and unstructured
information.

Communications and media solutions. Our communications and media industry solutions address

the creation, delivery and management  of  consumer and enterprise  communications services, with
offerings in service delivery infrastructure and applications, real-time  business  support systems,
next-generation operations support systems and digital media. These solutions  enable operators, media
companies, and network equipment providers to drive incremental revenue, enable  new business
models  and reduce infrastructure costs.

Personal Systems Group

PSG is  the leading provider of personal  computers (‘‘PCs’’)  in the world based on unit volume
shipped and annual revenue. PSG provides commercial PCs, consumer  PCs, workstations, handheld
computing devices, calculators and other related accessories, software  and services  for the  commercial
and consumer markets. We group commercial desktops, commercial notebooks and workstations  into
commercial clients and consumer desktop  and  consumer notebooks into consumer clients when
describing our performance in these  markets. Like  the broader PC  market,  PSG continues to
experience a shift toward mobile products such as notebooks. Both commercial and consumer PCs are
based predominately on the Windows(cid:4) operating system and use Intel and AMD processors.

Commercial PCs. PSG offers a variety of personal computers optimized for  commercial uses,

including enterprise and SMB customers, and for  connectivity and manageability in networked
environments. These commercial PCs include primarily the  HP Compaq  business desktops, notebooks,
tablet PCs, mini notebooks and mobile  workstations, as well  as the thin clients,  retail point of sale
systems, displays and the new TouchSmart  all-in-one PC  for  business.

Consumer PCs. Consumer PCs include the HP and Compaq series of multi-media consumer

desktops, notebooks and mini notebooks, including the TouchSmart  line of touch-enabled  all-in-one
desktops and notebooks.

Workstations. Workstations are individual computing products designed for users demanding
enhanced performance, such as computer animation, engineering  design and  other programs  requiring
high-resolution graphics. PSG provides workstations that run on  both Windows(cid:4) and Linux-based
operating systems.

Handheld Computing. PSG provides a series of HP iPAQ Pocket PC handheld computing devices

that run on Windows(cid:4) Mobile software. These products range  from basic PDAs to advanced
‘‘smartphone’’ devices with voice and data capability.

Imaging and Printing Group

IPG is the leading imaging and printing  systems provider in the  world for consumer and
commercial printer hardware, printing  supplies,  printing media and  scanning  devices.  IPG is  also
focused on imaging and printing solutions in the  commercial markets,  from managed print services
solutions to addressing new growth opportunities in commercial  printing and capturing high-value pages

6

in areas such as industrial applications,  outdoor signage and the graphic arts business. When describing
our  performance in this segment, we  group inkjet printer units  and retail  products  and services into
consumer hardware, LaserJet and enterprise  solutions  and graphics solutions into commercial hardware
and break out printer supplies separately.

Inkjet and Web Solutions. This unit delivers our consumer and SMB  inkjet  solutions (hardware,

ink, media) as well as developing our retail and web businesses.  It includes single function and
all-in-one inkjet printers targeted toward consumers and SMBs as well as retail publishing solutions,
Snapfish and Logoworks.

LaserJet and Enterprise Solutions. This unit is focused on delivering products  and  services to the

enterprise segment. It includes LaserJet  printers  and  supplies,  multi-function printers, scanners and
enterprise software solutions such as Exstream Software and Web Jetadmin.

Managed Enterprise Solutions. This unit is focused on delivering managed print services products

and solutions to Enterprise customers. This unit  partners  with third-party software  providers  to  offer
workflow solutions in the enterprise environment.

Graphics Solutions. Graphics solutions include large format  printing (Designjet, Scitex, ColorSpan

and NUR), large format supplies, inkjet  high-speed production  (WebPress) solutions and  supplies,
Indigo printing and specialty printing  systems.

Printer Supplies. Printer supplies include LaserJet toner, inkjet cartridges,  graphic solutions ink
products, including inks for our large format, super-wide and digital press products, and  other printing-
related media. These supplies include  HP-branded Vivera  and ColorSphere ink and  HP Premium and
Premium Plus photo papers, which are designed to work together  as a  system to produce  faster prints
with improved resistance to fading, increased print  quality and  better affordability.

HP Financial Services

HPFS supports and enhances HP’s global product and service  solutions, providing a broad range

of value-added financial life-cycle management services. HPFS enables  our  worldwide  customers  to
acquire complete IT solutions, including  hardware, software and services.  The group offers leasing,
financing, utility programs and asset recovery services, as well as  financial asset management  services
for large global and enterprise customers. HPFS also provides an array of specialized financial services
to SMBs  and educational and governmental  entities. HPFS offers innovative, customized and flexible
alternatives to balance unique customer  cash  flow, technology  obsolescence and capacity needs.

Corporate Investments

Corporate Investments includes Hewlett-Packard Laboratories, also known as  HP Labs, and certain

business incubation projects. Revenue in this segment is attributable  to  the sale  of certain network
infrastructure products, including Ethernet switch products that enhance computing and enterprise
solutions under the brand ProCurve  Networking.  Corporate Investments  also derives  revenue from
licensing specific HP technology to third  parties.

Sales, Marketing and Distribution

We manage our business and report  our financial results based on the principal business segments

described above. Our customers are organized by  consumer  and commercial customer  groups, and
distribution is organized by direct and  channel. Within  the channel, we have various types  of partners
that we utilize for various customer groups. The partners  include:

(cid:129) retailers that sell our products to the public through  their own physical or  Internet stores;

(cid:129) resellers that sell our products and services, frequently with their  own value-added products or

services, to targeted customer groups;

(cid:129) distribution partners that supply our solutions  to  smaller resellers with  which we do not have

direct relationships;

7

(cid:129) independent distributors that sell our products into geographies or customer  segments in  which

we have little or no presence;

(cid:129) original equipment manufacturers  (‘‘OEMs’’) that integrate our  products  with their own

hardware or software and sell the integrated  products;

(cid:129) independent software vendors (‘‘ISVs’’) that provide their clients with specialized  software

products, frequently driving sales of additional non-HP products and services, and  often  assist us
in selling our products and services to clients purchasing their  products; and

(cid:129) systems integrators that provide various levels and kinds of  expertise in designing and

implementing custom IT solutions and often partner with HPS  to  extend their expertise  or
influence the sale of our products and services.

The mix of HP’s business by channel or direct sales differs substantially by business and region. We

believe that customer buying patterns  and  different regional market conditions necessitate sales,
marketing and distribution to be tailored  accordingly. HP is  focused on  driving  the depth and breadth
of its coverage in addition to efficiencies  and  productivity  gains in  both  the direct  and indirect business.

The HP Enterprise Business manages most of  our enterprise  and  public sector customer

relationships and also has primary responsibility for simplifying sales processes  across our segments to
improve speed and effectiveness of customer delivery. In this capacity, the  HP Enterprise  Business
manages our direct sales for value products  including  UNIX(cid:4), enterprise storage and software  and
pre-sales technical consultants, as well  as our direct distribution activities for  commercial products  and
go-to-market activities with systems integrators and ISVs. The  HP Enterprise  Business also drives  HP’s
vertical sales and marketing approach  in  the communication, media and entertainment,  financial
services, manufacturing and distribution  and  public sector industries.

PSG manages SMB customer relationships  and commercial reseller  channels, due largely  to  the

significant volume of commercial PCs that HP  sells through these channels. In addition  to  commercial
channel  relationships, the Volume Direct organization, which  is charged  with the management  of direct
sales for volume products, is hosted within PSG. In addition, PSG manages direct online sales  through
the Consumer Exchange and the Small  Business Exchange.

IPG manages HP’s overall consumer-related sales and  marketing activities, including our annual

consumer product launch for the back-to-school and holiday seasons.  IPG  also manages consumer
channel  relationships with third-party retail locations for  imaging and printing products, as well  as other
consumer products, including consumer PCs,  which provides  for a  bundled sale  opportunity between
PCs and IPG products.

Manufacturing and Materials

We  utilize a number of outsourced manufacturers  (‘‘OMs’’) around the world to manufacture

HP-designed products. The use of OMs is  intended to generate cost efficiencies and reduce  time to
market for certain HP-designed products. Third-party OEMs  manufacture some products  that  we
purchase and resell under the HP brand. In addition to our  use of OMs, we currently  manufacture
finished products from components and  sub-assemblies that  we acquire from a wide range  of  vendors.

We  utilize two primary methods of fulfilling demand for products: building products to order and

configuring products to order. We employ building products to order capabilities to maximize
manufacturing efficiencies by producing  high volumes of basic  product configurations.  Configuring
products to order permits configuration  of units to the  particular hardware and software  customization
requirements of certain customers. Our inventory  management and distribution practices in both
building products to order and configuring products to order seek to minimize  inventory  holding

8

periods by taking delivery of the inventory and  manufacturing immediately prior  to  the sale  or
distribution of products to our customers.

We  purchase materials, supplies and  product subassemblies  from  a substantial number  of  vendors.

For most of our products, we have existing  alternate sources of supply, or such sources are  readily
available. However, we do rely on sole sources for  laser printer engines, LaserJet supplies  and parts for
products with short life cycles (although  some of these sources have operations in multiple locations).
We  are dependent upon Intel as a supplier of processors and  Microsoft  for  various software products.
However, we believe that disruptions  with  these suppliers would result in  industry-wide dislocations and
therefore would not disproportionately disadvantage us relative to our competitors. We also have  a
valued  relationship with AMD, and we  have  continued  to  see solid acceptance of AMD processors in
the market during fiscal 2009.

Like other participants in the high technology industry, we ordinarily acquire materials and

components through a combination of blanket and scheduled purchase orders to support our
requirements for periods averaging 90 to 120  days. From time to time, we experience significant price
volatility and supply constraints of certain components that are not  available  from multiple  sources.
Frequently, we are able to obtain scarce components for somewhat higher prices  on the  open market,
which  may have an impact on gross margin but does not disrupt production. On occasion, we acquire
component inventory in anticipation  of  supply constraints or enter  into longer-term pricing
commitments with vendors to improve  the priority,  price and  availability of supply. See ‘‘Risk Factors—
We  depend on third-party suppliers,  and  our  revenue and gross  margin could suffer if we fail  to
manage suppliers properly,’’ in Item 1A,  which is  incorporated herein by reference.

International

Our products and services are available worldwide.  We believe  this geographic diversity allows us
to meet demand on a worldwide basis for  both  consumer and enterprise customers, draws on  business
and technical expertise from a worldwide  workforce,  provides stability to  our operations, allows us  to
drive economies of scale, provides revenue  streams to offset  geographic economic trends and offers us
an opportunity to access new markets for  maturing products. In  addition,  we believe  that  future growth
is dependent in part on our ability to  develop  products and sales models  that target developing
countries. In this regard, we believe that  our broad geographic presence gives us a solid base upon
which  to build such future growth.

A summary of our domestic and international net  revenue and net  property,  plant  and equipment

is set forth in Note 19 to the Consolidated Financial Statements in Item 8,  which is  incorporated herein
by reference. Approximately 64% of  our  overall  net revenue in fiscal  2009 came from  outside the
United States. The substantial majority of our  net revenue originating  outside the  United States was
from customers other than foreign governments.

For a  discussion of risks attendant to HP’s foreign operations,  see ‘‘Risk Factors—Due  to  the
international nature of our business, political or economic changes  or  other factors could harm  our
future revenue, costs and expenses and  financial condition,’’ in Item 1A, ‘‘Quantitative and Qualitative
Disclosure about Market Risk’’ in Item 7A and Note  10 to the Consolidated Financial Statements in
Item 8, which are incorporated herein  by reference.

Research and Development

We  remain committed to innovation  as a key element of HP’s culture. Our development  efforts
are focused on designing and developing  products, services and solutions  that  anticipate customers’
changing  needs and desires and emerging  technological trends.  Our efforts also are focused on
identifying the areas where we believe  we  can make a  unique contribution and the areas  where

9

partnering with other leading technology  companies  will leverage  our cost structure and maximize  our
customers’ experiences.

HP Labs, together with the various research  and  development groups within the five principal

business segments, are responsible for  our research and development efforts. HP Labs is  part of  our
Corporate Investments segment.

Expenditures for research and development were  $2.8 billion  in fiscal 2009,  $3.5 billion in fiscal
2008 and $3.6 billion in fiscal 2007. We  anticipate that we will continue  to  have significant research and
development expenditures in the future  to provide a continuing  flow  of innovative, high-quality
products and services to maintain and enhance our competitive position.

For a  discussion of risks attendant to our  research and  development activities,  see ‘‘Risk Factors—

If we  cannot continue to develop, manufacture and market  products and services that meet  customer
requirements for innovation and quality, our revenue and gross margin may suffer,’’ in Item 1A,  which
is incorporated herein by reference.

Patents

Our general policy has been to seek patent protection  for  those inventions and improvements

likely to be incorporated into our products and services or  where proprietary rights  will  improve our
competitive position. At October 31, 2009, our worldwide  patent  portfolio  included over  33,000 patents,
which  was slightly above the number  of patents  in our patent portfolio at  the end of both  fiscal  2008
and fiscal 2007.

Patents generally have a term of twenty years from the  time they are filed. As our patent portfolio
has been built over time, the remaining terms  on the  individual patents vary. While we  believe that our
patents and applications are important  for maintaining the competitive differentiation of our products
and maximizing our return on research and development  investments,  no  single patent is in itself
essential to us as a whole or any of our principal  business segments.

In addition to developing our patents, we license intellectual property from third parties as we
deem appropriate. We have also granted  and continue to grant to others licenses under patents owned
by us when we consider these arrangements to be in  our  interest. These license arrangements include a
number of cross-licenses with third parties.

For a  discussion of risks attendant to intellectual  property  rights, see  ‘‘Risk Factors—Our revenue,

cost of sales, and expenses may suffer if  we  cannot continue  to  license or  enforce  the intellectual
property rights on which our businesses depend or if third parties assert that we violate their
intellectual property rights,’’ in Item 1A,  which is incorporated herein by reference.

Backlog

We  believe that backlog is not a meaningful indicator  of future  business  prospects due to the
diversity  of our products and services portfolio, including  the large volume of products delivered  from
shelf or channel partner inventories and the shortening of product life  cycles. Therefore,  we believe
that backlog information is not material to an understanding  of  our overall business.

Seasonality

General economic conditions have an impact on  our business and financial results. From time to

time, the markets in which we sell our  products experience  weak economic  conditions that may
negatively affect sales. We experience  some seasonal trends in the  sale of  our products and services.
For example, European sales often are  weaker  in the summer months  and  consumer sales often are
stronger in the fourth calendar quarter. Demand during  the spring and early summer months also may

10

be adversely impacted by market anticipation of seasonal trends.  See  ‘‘Risk  Factors—Our sales cycle
makes planning and inventory management difficult and  future financial results less predictable,’’ in
Item 1A, which is incorporated herein by  reference.

Competition

We  encounter aggressive competition in all areas of our business activity. We  compete primarily  on
the basis of technology, performance, price, quality, reliability, brand, reputation, distribution,  range of
products and services, ease of use of our products, account  relationships, customer training, service and
support, security and availability of application software and our Internet infrastructure offerings.

The markets for each of our business  segments are characterized by  vigorous  competition among

major corporations with long-established positions  and a  large number  of new and rapidly growing
firms. Product life cycles are short, and to remain competitive we must develop new  products and
services, periodically enhance our existing  products and services and compete effectively on the basis of
the factors listed above. In addition,  we compete with many  of  our current and potential partners,
including OEMs that design, manufacture and often  market  their products under their own brand
names. Our successful management of these  competitive partner relationships will  continue to be
critical to our future success. Moreover, we anticipate  that  we will  have to continue to adjust prices  on
many  of our products and services to stay competitive.

On a revenue basis we are the largest company offering our range  of general  purpose computers

and personal information, imaging and  printing products  for industrial, scientific, business and
consumer applications, and IT services. We  are the leader or among the leaders  in each of our
principal business segments.

The competitive environments in which each segment operates  are described  below:

Enterprise Storage and Servers. The areas in which ESS operates are  intensely competitive and are

characterized by rapid and ongoing technological innovation and  price reductions. Our  competitors
range from broad solution providers such  as International Business  Machines Corporation  (‘‘IBM’’)  to
more focused competitors such as EMC  Corporation (‘‘EMC’’)  and Network Appliance, Inc.  in storage
and Dell, Inc. (‘‘Dell’’) in industry standard  servers. We believe that  our important  competitive
advantages in this segment include the six technology components of our  converged  infrastructure
initiatives: IT systems, power and cooling, security, management, virtualization and automation.  We
believe that our competitive advantages  also  include our global  reach and our significant  intellectual
property portfolio and research and development capabilities, which  will contribute to further
enhancements of our product and service offerings and our ability to cross-sell our portfolio and
leverage  scale advantages in everything  from brand  to  procurement leverage.

Services. Our service businesses including HP Enterprise Services  and Technology Services

compete in IT support services, consulting and  integration, infrastructure technology  outsourcing,
business process outsourcing and application services. The  IT support services  and consulting and
integration markets have been under  significant pressure as our  customers have  reduced  their  IT
budgets. However, this trend has benefited the outsourcing services business as  customers drive toward
lower IT  management costs to enable more strategic  investments.  Our competitors include IBM Global
Services, Computer Sciences Corporation, systems integration  firms  such as  Accenture Ltd. and
offshore companies such as Fujitsu and India-based competitors Wipro Ltd, Infosys Technologies Ltd.
and  Tata Consultancy Services Ltd. We also compete  with other traditional hardware providers, such as
Dell, which are increasingly offering services to support their products. Many  of  our  competitors are
able  to offer a wide range of global services, and  some of  our competitors  enjoy significant brand
recognition. Our service businesses team with many companies to offer services, and those
arrangements allow us to extend our reach  and augment our capabilities.  Our competitive advantages
are evident in our deep technology expertise,  which includes multi-vendor environments, virtualization

11

and automation, our strong track record  of  collaboration with  clients and partners, and the combination
of our expertise in infrastructure management with skilled global resources in  SAP,  Oracle and
Microsoft platforms.

HP Software. The areas in which HP Software operates are  fueled by  rapidly changing customer

requirements and technologies. We market  enterprise IT management software in  competition with
IBM, Computer Associates International (‘‘CAI’’),  BMC Software, Inc.  and others.  Our information
management and business intelligence solutions compete with products  from companies like Symantec,
IBM, EMC, CAI, and Teradata. We also  deliver communications and media solutions that compete
with products from IBM and various other  competitors. As new  delivery mechanisms  such as
software-as-a-service come on the scene,  we’re also confronting less traditional competitors. Our
differentiation lies in the breadth and depth of our  software and services  portfolio  and the  scope  of our
market coverage.

Personal  Systems Group. The areas in which PSG operates are intensely competitive  and are

characterized by rapid price reductions  and  inventory depreciation. Our primary competitors for the
branded personal computers are Dell,  Acer Inc., ASUSTeK Computer Inc., Apple Inc., Lenovo Group
Limited and Toshiba Corporation. In particular regions, we  also experience competition  from local
companies and from generically-branded or  ‘‘white box’’ manufacturers. Our  competitive advantages
include our broad product portfolio, our innovation and  research and development capabilities, our
brand and procurement leverage, our ability to cross-sell our portfolio of offerings, our extensive
service and support offerings and the availability of our broad-based distribution of products from retail
and commercial channels to direct sales.

Imaging and Printing Group. The markets for printer hardware and associated  supplies  are highly
competitive, especially with respect to pricing and the  introduction of new products  and features. IPG’s
key competitors include Canon USA, Inc., Lexmark International, Inc., Xerox Corporation, Seiko
Epson Corporation, Samsung  Electronics Co. Ltd.  and Brother Industries, Ltd. In addition,
independent suppliers offer refill and remanufactured alternatives for our supplies  which, although
generally offering lower print quality  and  reliability, may be offered at lower  prices and put pressure on
our  supplies sales and margins. Other  companies also  have developed and marketed new compatible
cartridges for HP’s laser and inkjet products, particularly in jurisdictions outside of the United States
where  adequate intellectual property  protection may not exist. In recent years, we  and our competitors
have regularly lowered prices on printer hardware both to reach new customers and in response to the
competitive environment. Important  areas  for future growth include printer-based multi-function
devices in the office space, digital presses in  our imaging and graphics space and driving color printing
expansion in the office. We believe we  will provide  important new contributions in the home,  the office
and publishing environments by providing  comprehensive solutions.

HP Financial Services.

In our financing business, our competitors  are captive financing companies,

mainly IBM Global Financing, as well  as banks  and  financial institutions. We believe  our competitive
advantage in this business over banks and financial institutions is our ability to finance products,
services and total solutions.

For a  discussion of risks attendant to these competitive factors, see ‘‘Risk Factors—The

competitive pressures we face could  harm  our revenue, gross margin and prospects,’’ in Item 1A, which
is incorporated herein by reference.

Environment

Our operations are subject to regulation under various federal, state, local and foreign laws

concerning the environment, including  laws addressing the discharge of pollutants into the air and
water, the management and disposal of  hazardous substances and wastes, and  the cleanup of

12

contaminated sites. We could incur substantial costs, including  cleanup  costs,  fines and civil or criminal
sanctions, and third-party damage or personal  injury claims,  if we were to violate or become liable
under environmental laws.

Many of our products are subject to various  federal,  state, local  and foreign laws governing

chemical substances in products and their safe use, including  laws regulating the manufacture  and
distribution of chemical substances and laws restricting the presence  of  certain substances  in electronics
products. Some of our products also are,  or  may  in the future be, subject to requirements applicable to
their energy consumption. We face increasing  complexity in our product design and procurement
operations as we adjust to new and future requirements relating to the chemical and materials
composition of our products, their safe use, and their energy efficiency, including those that may result
from climate change legislation. In the  event our  products  become non-compliant with  these laws, they
could be enjoined from entering certain  jurisdictions and we could face other sanctions,  including fines.

We  also are subject to legislation in an increasing number of  jurisdictions  that  makes  producers of

electrical goods, including computers  and  printers,  financially responsible  for specified collection,
recycling, treatment and disposal of past  and future covered  products (sometimes referred to as
‘‘product take-back legislation’’). There  is  no assurance that  such existing or future  laws  will  not  have a
material adverse effect on HP’s operations  or financial condition, although HP does not anticipate that
effects of product take-back legislation  will  be  different  or more severe for HP  than the impacts  on
others in the  electronics industry.

We  are committed to maintaining compliance with  all environmental laws applicable to our
operations, products and services and to reducing our environmental impact across all aspects of  our
business. We meet this commitment  with a comprehensive environmental, health and  safety policy,
strict environmental management of  our operations and  worldwide environmental programs and
services.

The liability for environmental remediation and other environmental costs is  accrued when HP

considers it probable and can reasonably  estimate  the costs.  Environmental  costs and accruals are
presently not material to our operations  or financial  position. Although there is no assurance that
existing or future environmental laws  applicable  to  our  operations  or  products will not have  a material
adverse effect on HP’s operations or  financial condition, we do not currently anticipate material capital
expenditures for environmental control facilities.

Executive Officers:

Mark V. Hurd; age 52; Chairman, Chief Executive Officer and President

Mr. Hurd has served as Chairman of HP  since September 2006  and as  Chief Executive Officer,

President and a member of the Board since April  2005. Prior to that, he served as  Chief  Executive
Officer of NCR Corporation, a technology  company,  from March  2003 to March 2005  and as  President
from July 2001 to March 2005. Mr. Hurd also is a director of News  Corporation.

Peter J. Bocian; age 54; Executive Vice  President and  Chief Administrative Officer

Mr. Bocian has served as Executive Vice President and Chief Administrative Officer since

December 2008. Previously, Mr. Bocian  served as  Executive Vice President, Chief Financial Officer  and
Chief Administrative Officer of Starbucks  Corporation,  a roaster and retailer of specialty coffee, from
October 2007 until November 2008 after having served as  Executive Vice President  and Chief Financial
Officer designate of Starbucks since May 2007. Prior to joining Starbucks,  Mr.  Bocian served  in various
positions at NCR Corporation since 1983, most recently  as  Senior Vice President and Chief Financial
Officer from September 2004 until May 2007.

13

R. Todd  Bradley; age 51; Executive Vice President, Personal Systems Group

Mr. Bradley has served as Executive  Vice President of HP’s Personal  Systems  Group since June

2005. Previously he served as the Chief  Executive  Officer  of  palmOne  Inc., a mobile  computing
company, from October 2003 to June  2005.

Michael J. Holston; age 47; Executive Vice  President, General Counsel and Secretary

Mr. Holston has served as Executive  Vice President and  General  Counsel since February 2007  and

as Secretary since March 2007. Prior to that,  he was a partner in the  litigation practice at Morgan,
Lewis  & Bockius LLP, where, among other clients, he supported HP  as external counsel on a variety of
litigation and regulatory matters for more  than ten years.

Vyomesh I. Joshi; age 55; Executive Vice  President, Imaging  and  Printing  Group

Mr. Joshi has served as Executive Vice  President  of  HP’s Imaging and Printing Group since 2002.

Mr. Joshi also is a director of Yahoo!  Inc.

Catherine A.  Lesjak; age 50; Executive Vice President  and Chief Financial  Officer

Ms. Lesjak has served as Executive Vice President and  Chief Financial  Officer since  January 2007.
Previously, she served as Senior Vice President from  2003 until December 2006 and as Treasurer  from
2003 until March 2007.

Ann M. Livermore; age 51; Executive  Vice  President,  HP Enterprise Business

Ms. Livermore has served as Executive  Vice  President  of the HP Enterprise Business since May
2004. From 2002 until May 2004, she served as Executive Vice  President  of  HP Services.  Ms. Livermore
also is a director of United Parcel Service, Inc.

John N. McMullen; age 51; Senior Vice  President and Treasurer

Mr. McMullen has served as Senior Vice President and Treasurer since March  2007. Previously, he

served as Vice President of Finance for HP’s Imaging and Printing  Group from May 2002  until 2007.

Randall D. Mott; age 53; Executive Vice  President and Chief Information Officer

Mr. Mott has served as Executive Vice President and Chief Information Officer since July 2005.

From 2000 to June 2005, Mr. Mott was  Senior Vice President and  Chief Information Officer of
Dell, Inc., a technology company.

James T.  Murrin; age 49; Senior Vice  President,  Controller and Principal Accounting Officer

Mr. Murrin has served as Senior Vice  President,  Controller and Principal  Accounting Officer since

March 2007. Previously, he served as  Vice President of Finance for the former  Technology Solutions
Group since 2004. Prior to that, Mr.  Murrin  was  Vice President of Finance for HP  Services and held
various other finance positions at HP since joining the company in 1989.

Marcela Perez de Alonso; age 55; Executive Vice President, Human  Resources

Ms. Perez de Alonso has served as Executive Vice President, Human Resources since  January
2004. From 1999 until she joined HP  in January 2004, Ms.  Perez de Alonso was Division Head of
Citigroup North Latin America Consumer Bank,  in charge of the  retail business operations of
Citigroup in Puerto Rico, Venezuela, Colombia,  Peru, Panama, the  Bahamas and the Dominican
Republic.

14

Shane V. Robison; age 56; Executive  Vice President and  Chief  Strategy and Technology Officer

Mr. Robison has served as Executive  Vice President and Chief Strategy and Technology  Officer

since May 2002.

Employees

We  had approximately 304,000 employees worldwide  as of October 31, 2009.

Available  Information and Exchange Certifications

Our Annual Report on Form 10-K, Quarterly Reports on  Form 10-Q, Current Reports on
Form 8-K and amendments to reports  filed or  furnished pursuant to Sections 13(a) and 15(d) of the
Securities Exchange Act of 1934, as amended, are  available on our  website at http://www.hp.com/
investor/home, as soon as reasonably  practicable  after HP electronically files such reports with, or
furnishes those reports to, the Securities and Exchange Commission. HP’s  Corporate  Governance
Guidelines, Board of Directors committee charters (including  the charters of the Audit Committee, HR
and Compensation Committee, and Nominating and Governance Committee) and code of ethics
entitled ‘‘Standards of Business Conduct’’  also are  available at that same location on our website.
Stockholders may request free copies of these documents  from:

Hewlett-Packard Company
Attention: Investor Relations
3000 Hanover Street
Palo Alto, CA 94304
(866) GET-HPQ1 or (866) 438-4771
http://www.hp.com/investor/informationrequest

ITEM 1A. Risk Factors.

Because of the following factors, as well as other variables affecting our operating  results, past

financial performance may not be a reliable indicator of  future performance, and historical  trends
should not be used to anticipate results  or  trends  in future periods.

The competitive pressures we face could harm our  revenue,  gross margin  and prospects.

We encounter aggressive competition from numerous  and varied competitors in  all  areas of our
business, and our competitors may target our key market segments. We compete primarily on the  basis
of technology, performance, price, quality, reliability, brand, reputation, distribution,  range of products
and  services, ease of use of our products, account relationships,  customer training, service and support,
security, availability of application software, and Internet infrastructure offerings. If  our products,
services, support and cost structure do not enable us  to  compete successfully  based on any  of  those
criteria, our operations, results and prospects could be harmed.

Unlike many of our competitors, we have  a portfolio of businesses and must allocate  resources
across these businesses while competing  with companies that specialize in one or  more of these product
lines. As a result, we may invest less  in certain areas of our businesses than our competitors do, and
these competitors may have greater financial, technical and marketing resources available to them than
our businesses that compete against them. Industry consolidation  also may affect competition by
creating larger, more homogeneous and  potentially stronger competitors in the markets in which we
compete, and our competitors also may  affect  our business by entering  into  exclusive  arrangements with
existing or potential customers or suppliers.

We may have to continue to lower the prices of many of  our products and services  to  stay
competitive, while at the same time trying to maintain  or improve revenue and  gross margin.  The

15

markets in which we do business, particularly the personal  computer and printing markets, are  highly
competitive, and we encounter aggressive  price competition for all  of  our products and services from
numerous companies globally. Over the past several  years, price  competition in  the market for  personal
computers, printers and related products  has been particularly  intense  as competitors have aggressively
cut prices and lowered their product  margins for these  products.  In addition, competitors in some  of
the markets in which we compete with  a greater presence in lower-cost jurisdictions may  be  able to
offer lower prices than we are able to  offer. Our  results of operations  and financial condition may be
adversely affected by these and other industry-wide pricing  pressures.

Because our business model is based  on providing innovative and high  quality products, we  may
spend a proportionately greater amount on research  and development  than some of our competitors. If
we cannot proportionately decrease our cost structure on  a timely basis  in response to competitive price
pressures, our gross margin and, therefore,  our  profitability could be adversely affected. In addition,  if
our  pricing and other factors are not  sufficiently  competitive,  or if there  is an adverse reaction  to  our
product  decisions, we may lose market share in certain  areas, which  could  adversely affect  our revenue
and prospects.

Even if we are able to maintain or increase market share for a particular product,  revenue could
decline  because the product is in a maturing  industry.  Revenue  and  margins also could decline  due  to
increased competition from other types of products. For example, refill  and  remanufactured alternatives
for some of HP’s LaserJet toner and  inkjet cartridges compete with HP’s supplies business. In addition,
other companies have developed and marketed new compatible  cartridges for HP’s LaserJet and inkjet
products, particularly in jurisdictions outside of the  United States where adequate intellectual  property
protection may not exist. HP expects  competitive refill and remanufacturing and cloned cartridge
activity to continue to pressure margins  in  IPG, which in turn has a significant  impact  on HP  margins
and profitability overall.

If we cannot continue to develop, manufacture and market products and services that meet customer
requirements for innovation and quality, our  revenue  and gross  margin may suffer.

The process of developing new high technology products and services  and  enhancing existing
products and services is complex, costly and  uncertain,  and any failure by us to anticipate customers’
changing  needs and emerging technological trends accurately could significantly  harm our market share
and results of operations. We must make long-term  investments, develop or obtain appropriate
intellectual property and commit significant resources before knowing  whether our predictions will
accurately reflect customer demand for  our products  and services. After we develop a product,  we must
be able to manufacture appropriate volumes quickly  and  at low costs. To accomplish  this, we must
accurately forecast volumes, mixes of products and configurations that meet customer  requirements,
and we may not succeed at doing so  at all or within a given  product’s life cycle. Any delay in the
development, production or marketing  of a  new product could  result  in our  not  being  among  the first
to market, which could further harm our competitive  position.

In the course of conducting our business,  we must adequately address  quality issues associated with
our  products and services, including defects in our engineering, design and manufacturing processes,  as
well as defects in third-party components  included in our  products.  In order to address quality issues,
we work extensively with our customers  and  suppliers  and  engage in product testing  to  determine the
cause  of  the problem and to determine appropriate solutions. However, we may have limited  ability  to
control quality issues, particularly with  respect  to  faulty  components manufactured  by  third parties. If
we are unable to determine the cause,  find an appropriate solution or offer a temporary fix (or
‘‘patch’’), we may delay shipment to  customers, which would delay  revenue  recognition and could
adversely affect our revenue and reported  results. Finding solutions to quality issues can be expensive
and may result in additional warranty,  replacement and other  costs,  adversely affecting our  profits. If
new or existing customers have difficulty  operating  our  products, our operating margins could be

16

adversely affected, and we could face  possible claims if we fail  to  meet  our  customers’  expectations. In
addition, quality issues can impair our relationships with  new  or  existing customers and adversely affect
our  brand and reputation, which could  have a  material adverse effect on our  operating results.

Economic weakness and uncertainty could  adversely affect our revenue, gross  margin and expenses.

Our revenue and gross margin depend  significantly  on worldwide  economic conditions and the

demand for computing and imaging products and services  in the markets in which we compete.
Economic weakness and uncertainty  have  resulted, and may result  in the future, in decreased revenue,
gross  margin, earnings or growth rates and difficulty managing inventory levels. For example, we have
recently experienced reduced revenue  from our product  businesses due to slowing global  economic
growth, declines in the availability of  credit, weakening consumer and business confidence,  increased
unemployment, reduced levels of capital expenditures  and other challenges currently affecting the
global  economy. Sustained uncertainty  about current  global economic conditions may result  in our
customers continuing to postpone spending, which could adversely affect demand for our products  and
services. Economic weakness and uncertainty  also make it  more difficult for us to make accurate
forecasts of revenue, gross margin and  expenses.

We  also have experienced, and may experience in  the future,  gross margin  declines in certain
businesses, reflecting the effect of items such as  competitive  pricing pressures, inventory write  downs
and increases in component and manufacturing costs  resulting from higher labor and material costs
borne by our manufacturers and suppliers that,  as a result  of  competitive pricing pressures or other
factors, we are unable to pass on to our customers. In addition, our  business may be disrupted if we
are unable to obtain equipment, parts  and  components from our  suppliers—and our suppliers from
their suppliers—due to the insolvency  of  key suppliers or the inability of key suppliers  to  obtain  credit.

Economic weakness and uncertainty  could cause our expenses  to  vary  materially from our

expectations. Any renewed financial turmoil affecting the banking  system and  financial  markets  or any
significant financial services institution  failures  could negatively impact our treasury  operations,  as the
financial condition of such parties may  deteriorate rapidly and without  notice in times  of market
volatility and disruption. Poor financial performance  of asset markets could lead to increased pension
and post-retirement benefit expenses. Other income and expense could vary materially from
expectations depending on changes in  interest rates, borrowing costs,  currency exchange  rates, hedging
expenses and the fair value of derivative instruments. Economic downturns also may lead to
restructuring actions and associated expenses.

We depend on third-party suppliers, and  our revenue and gross margin could  suffer if we fail to manage
suppliers properly.

Our operations depend on our ability  to  anticipate our needs for components, products  and
services and our suppliers’ ability to deliver sufficient quantities of quality components, products and
services at reasonable prices in time  for  us to meet critical schedules. Given  the wide variety of systems,
products and services that we offer, the  large  number of  our suppliers and contract manufacturers that
are dispersed across the globe, and the long lead times that are required to  manufacture, assemble and
deliver certain components and products, problems could arise in planning  production  and managing
inventory levels that could seriously harm  us. Other supplier problems  that we  could  face include
component shortages, excess supply, risks  related to the terms of our contracts  with suppliers, risks
associated with contingent workers, and  risks related to our relationships with single source suppliers,
as described below.

(cid:129) Shortages. Occasionally we may experience a shortage  of,  or a delay in receiving, certain

components as a result of strong demand,  capacity constraints, supplier financial weaknesses,
inability of suppliers to borrow funds in the  credit markets,  disputes with suppliers  (some of

17

whom are also customers), disruptions in  the operations of component suppliers, other problems
experienced by suppliers or problems faced during the  transition to new suppliers.  In  particular,
our  PC business relies heavily upon outsourced manufacturers (‘‘OMs’’) to manufacture its
products and is therefore dependent  upon the  continuing  operations of  those OMs to fulfill
demand for our PC products. HP represents  a substantial portion of the  business  of  some of
these OMs, and any changes to the nature or volume  of business transacted by HP with a
particular OM could adversely affect the operations and financial condition of  the OM and lead
to shortages or delays in receiving products from that  OM. If shortages or delays persist, the
price of these components may increase, we may be exposed to quality issues or the components
may not be available at all. We may not be able to secure enough components at  reasonable
prices or of acceptable quality to build products or provide services in a  timely  manner in the
quantities or according to the specifications needed. Accordingly, our revenue and gross margin
could suffer as we could lose time-sensitive  sales, incur  additional freight  costs or  be  unable to
pass on price increases to our customers. If we cannot adequately  address supply issues, we
might have to reengineer some products or  service  offerings, resulting in  further costs and
delays.

(cid:129) Oversupply. In order to secure components for the  provision of products or services, at  times we

may make advance payments to suppliers or enter into non-cancelable  commitments with
vendors. In addition, we may purchase  components strategically in advance  of  demand to take
advantage of favorable pricing or to address concerns  about  the availability of  future
components. If we fail to anticipate customer  demand properly,  a  temporary oversupply could
result in excess or obsolete components, which could adversely affect our gross margin.

(cid:129) Contractual terms. As a result of binding price or purchase commitments with vendors, we may

be obligated to purchase components  or services at prices that  are  higher than those  available in
the current market and be limited in  our ability  to  respond to changing market conditions. In
the event that we become committed to purchase components  or  services for  prices in excess  of
the current market price, we may be  at a  disadvantage to competitors  who have access to
components or services at lower prices, and our  gross margin could  suffer.  In  addition, many  of
our  competitors obtain products or components from the  same  OMs and suppliers  that  we
utilize. Our competitors may obtain better pricing and other terms  and  more  favorable
allocations of products and components  during periods  of limited  supply,  and our  ability to
engage in relationships with certain OMs and suppliers could be limited. The practice employed
by our PC business of purchasing product components  and transferring those components to its
OMs may create large supplier receivables with the  OMs that,  depending on the financial
condition of the OMs, may have risk of  uncollectability. In addition,  certain of our OMs and
suppliers may decide in the future to discontinue conducting business with us.  Any  of  these
actions by our competitors, OMs or suppliers could adversely affect our future  operating results
and financial condition.

(cid:129) Contingent workers. We also rely on third-party suppliers for  the provision of contingent workers,
and our failure to manage our use of such workers effectively could adversely affect our  results
of operations. We  have been exposed to various legal claims relating  to  the status of contingent
workers in the past and could face similar claims  in the future. We may be subject to shortages,
oversupply or fixed contractual terms relating  to  contingent workers,  as described above. Our
ability to manage the size of, and costs associated  with, the  contingent workforce may be subject
to additional constraints imposed by local laws.

(cid:129) Single source suppliers. Our use of single source suppliers for certain  components  could

exacerbate our supplier issues. We obtain a  significant number of components from  single
sources due to technology, availability, price, quality or  other  considerations. For example,  we
rely on Intel Corporation to provide us with  a sufficient supply  of processors  for many  of  our

18

PCs, workstations, handheld computing devices and servers, and some of those processors are
customized for our products. New products that  we introduce may utilize  custom components
obtained from only one source initially until we have evaluated  whether  there is a need for
additional suppliers. Replacing a single  source  supplier  could delay production of some  products
as replacement suppliers initially may be subject  to  capacity constraints  or  other output
limitations. For some components, such as customized components  and some of the processors
that we obtain from Intel, alternative sources may  not  exist or those  alternative sources may be
unable to produce the quantities of those components necessary to satisfy our production
requirements. In addition, we sometimes purchase components  from single source suppliers
under short-term agreements that contain  favorable  pricing and other terms but  that  may be
unilaterally modified or terminated by the supplier with limited notice  and  with little or  no
penalty. The performance of such single source suppliers under  those agreements  (and the
renewal or extension of those agreements upon similar terms) may affect the quality, quantity
and price of components to HP. The  loss of a  single  source supplier, the  deterioration of our
relationship with a single source supplier, or any unilateral modification to the  contractual  terms
under which we are supplied components by a single source supplier could adversely affect  our
revenue and gross margins.

Business disruptions could seriously harm  our future revenue and financial condition and  increase our costs
and expenses.

Our worldwide operations could be subject  to  earthquakes, power shortages, telecommunications

failures, water shortages, tsunamis, floods,  hurricanes, typhoons, fires,  extreme weather conditions,
medical epidemics or pandemics and other natural  or manmade  disasters  or  business  interruptions, for
which  we are predominantly self-insured. The occurrence  of any of  these business  disruptions could
seriously harm our revenue and financial  condition  and  increase our costs and expenses. Our  corporate
headquarters, and a portion of our research  and development  activities, are  located in California, and
other critical business operations and some of our suppliers are located  in California and Asia, near
major earthquake faults. In addition,  all six of our worldwide IT data  centers are  located in the
southern United States, making our operations more vulnerable to natural  disasters or  other  business
disruptions occurring in that geographical area. The manufacture  of  product components, the  final
assembly of our products and other critical operations are  concentrated in certain  geographic locations,
including Shanghai, Singapore and India.  We also  rely on major  logistics hubs primarily in  Asia to
manufacture and distribute our products and in the southwestern United  States  to  import products into
the Americas region. Our operations could be adversely affected if manufacturing,  logistics or other
operations in these locations are disrupted for  any  reason, including natural  disasters, information
technology system failures, military actions or economic,  business, labor,  environmental, public health,
or political issues. The ultimate impact on us,  our significant suppliers and our general  infrastructure of
being located near major earthquake faults and being consolidated in certain geographical  areas is
unknown, but our revenue, profitability  and  financial condition could suffer in  the event of a  major
earthquake or other natural disaster.

System security risks, data protection breaches and  systems integration issues could disrupt  our internal
operations or information technology services provided to customers,  and any such disruption could reduce
our expected revenue, increase our expenses,  damage our reputation  and  adversely  affect  our stock  price.

Experienced computer programmers and hackers  may be able  to  penetrate our network security
and misappropriate our confidential  information  or that of third parties, create system  disruptions or
cause  shutdowns. Computer programmers  and hackers  also may  be  able to develop and deploy viruses,
worms, and other malicious software  programs that  attack our products  or  otherwise exploit any
security vulnerabilities of our products. In  addition, sophisticated hardware  and operating system
software and applications that we produce or  procure  from third parties may  contain defects in design

19

or manufacture, including ‘‘bugs’’ and  other problems that could unexpectedly interfere with the
operation of the system. The costs to  us  to eliminate or  alleviate security problems, bugs, viruses,
worms, malicious software programs  and security vulnerabilities  could be significant, and  the efforts to
address these problems could result in  interruptions, delays, cessation  of  service and  loss of existing or
potential customers that may impede  our  sales, manufacturing, distribution  or other critical functions.

We  manage and store various proprietary  information and sensitive  or confidential  data  relating  to

our  business. In addition, our outsourcing services business routinely processes,  stores and transmits
large amounts of data for our clients,  including  sensitive and  personally identifiable information.
Breaches of our security measures or  the accidental  loss, inadvertent disclosure or unapproved
dissemination of proprietary information  or  sensitive or confidential data about  us or our clients,
including the potential loss or disclosure of such information  or data as a  result of fraud, trickery or
other forms of deception, could expose  us, our customers  or the individuals  affected to a risk of loss or
misuse of this information, result in litigation and  potential  liability  for us, damage our brand and
reputation or otherwise harm our business. We also could lose existing or potential customers for
outsourcing services or other information technology solutions or  incur significant expenses in
connection with our customers’ system failures  or any actual or perceived security vulnerabilities  in our
products. In addition, the cost and operational consequences of implementing further data protection
measures could be significant.

Portions  of our IT infrastructure also  may experience interruptions,  delays or cessations of  service
or produce errors in connection with  systems integration or migration work  that  takes place from time
to time. We may not be successful in  implementing new  systems and  transitioning data which  could
cause  business disruptions and be more expensive, time consuming, disruptive and  resource-intensive.
Such disruptions could adversely impact  our ability to fulfill orders and interrupt other processes.
Delayed sales, lower margins or lost  customers  resulting from these disruptions have adversely  affected
in the past, and in the future could adversely affect, our  financial  results, stock  price and  reputation.

The revenue and profitability of our operations have  historically varied, which makes our future financial
results less predictable.

Our revenue, gross margin and profit vary among our products and services, customer  groups and
geographic markets and therefore will likely be different in future periods than  our current results.  Our
revenue depends on the overall demand  for our products  and services. Delays or reductions in  IT
spending could materially adversely affect demand for our products and services, which could result in
a significant decline in revenues. Overall gross margins and profitability in any given  period are
dependent partially on the product, customer and geographic  mix reflected in that period’s net revenue.
In particular, IPG and certain of its business units  such as  printer supplies contribute  significantly  to
our  gross margin and profitability. In  addition, our services business has  contributed significantly to our
revenue and operating profit in recent  periods. Competition, lawsuits, investigations  and other risks
affecting those businesses therefore may have  a significant  impact on our overall gross margin and
profitability. Certain segments, and ESS in particular, have a  higher fixed cost  structure and more
variation in gross margins across their  business units and product  portfolios than others  and may
therefore experience significant operating profit volatility on a quarterly  basis. In addition, newer
geographic markets may be relatively less profitable due to  investments associated with  entering those
markets and local  pricing pressures, and  we may have difficulty  establishing and maintaining the
operating infrastructure necessary to support the  high growth rate associated  with some of those
markets. Market trends, competitive pressures, commoditization of products, seasonal rebates, increased
component or shipping costs, regulatory impacts and other  factors may  result in  reductions in  revenue
or pressure on gross margins of certain  segments in a given  period, which may necessitate adjustments
to our operations.

20

HP’s stock price has historically fluctuated and may continue  to fluctuate, which may make future prices of
HP’s stock difficult to predict.

HP’s stock price, like that of other technology  companies, can be volatile.  Some  of the factors  that

could affect our stock price are:

(cid:129) speculation in the press or investment community about, or  actual  changes in,  our  business,
strategic position, market share, organizational structure, operations, financial condition,
financial reporting and results, effectiveness of  cost cutting efforts, value or  liquidity of our
investments, exposure to market volatility, prospects, business combination or  investment
transactions, or executive team;

(cid:129) the announcement of new products, services, technological innovations  or acquisitions by HP or

its  competitors;

(cid:129) quarterly increases or decreases in  revenue, gross margin, earnings  or cash flow  from operations,
changes in estimates by the investment  community or guidance provided by HP, and variations
between actual and estimated financial results;

(cid:129) announcements  of actual and anticipated financial  results by HP’s competitors and other

companies in the IT industry; and

(cid:129) the timing and amount of share repurchases by HP.

General or industry specific market conditions or stock market performance or domestic or
international macroeconomic and geopolitical factors unrelated to HP’s performance also  may affect
the price of HP common stock. For these  reasons, investors should not rely  on recent trends  to  predict
future stock prices, financial condition,  results  of operations  or cash flows. In addition,  following
periods of volatility in a company’s securities, securities class  action litigation against a company  is
sometimes instituted. If instituted against  HP, this type of  litigation could result in  substantial costs and
the diversion  of management time and resources.

Our revenue, cost of sales, and expenses  may suffer  if we cannot continue to license or  enforce the
intellectual property rights on which our  businesses depend or if third parties  assert that we violate their
intellectual property rights.

We  rely  upon patent, copyright, trademark and trade  secret  laws in the United States, similar laws

in other countries, and agreements with our employees, customers,  suppliers and other parties,  to
establish and maintain intellectual property  rights in  the technology and products  we sell, provide or
otherwise use in our operations. However, any of our direct or indirect intellectual property  rights
could be challenged, invalidated or circumvented, or  such intellectual  property rights  may not be
sufficient to permit us to take advantage  of current market trends or otherwise to provide  competitive
advantages, either of which could result in costly  product redesign  efforts, discontinuance of  certain
product  offerings or other competitive  harm.  Further,  the laws  of certain countries  do  not  protect
proprietary rights to the same extent  as the  laws  of the United States. Therefore, in certain jurisdictions
we may be unable to protect our proprietary technology  adequately against unauthorized  third-party
copying or use; this too could adversely affect our competitive position.

Because of the rapid pace of technological change  in the information technology  industry,  much  of
our  business and many of our products rely on key technologies  developed or  licensed by third  parties.
We  may not be able to obtain or continue  to obtain licenses and technologies from  these  third parties
at all or on reasonable terms, or such third  parties may demand  cross-licenses to our intellectual
property. In addition, it is possible that as a  consequence of a  merger or acquisition, third parties may
obtain licenses to some of our intellectual property rights or our business may be subject  to  certain
restrictions that were not in place prior  to  the transaction. Consequently,  we may  lose a competitive

21

advantage with respect to these intellectual property rights  or we  may be required to enter into costly
arrangements in order to terminate or limit these rights.

Third parties also may claim that we  or  customers indemnified  by us  are infringing  upon their
intellectual property rights. For example,  in  recent years individuals and groups have begun purchasing
intellectual property assets for the sole  purpose  of  asserting claims  of infringement  and attempting to
extract settlements from large companies such as  HP. If we cannot or do  not  license the  infringed
technology at all or on reasonable terms,  or substitute similar  technology  from another source, our
operations could be adversely affected. Even if we  believe that the claims  are without  merit, they can
be time-consuming and costly to defend and may divert management’s  attention and resources away
from our business. Claims of intellectual property infringement  also might require  us  to  redesign
affected products, enter into costly settlement  or license  agreements, pay costly damage awards, or face
a temporary or permanent injunction  prohibiting us from importing, marketing or selling certain of our
products. Even if we have an agreement to indemnify us against such costs, the indemnifying party may
be unable to uphold its contractual obligations to us.

Finally, our results of operations and cash flows could be affected in certain  periods and on an
ongoing basis by the imposition, accrual  and  payment of  copyright levies or  similar fees. In certain
countries (primarily in Europe), proceedings are  ongoing  against  HP in which  groups representing
copyright owners seek to impose upon and collect from  HP levies  upon  equipment (such as PCs,
multifunction devices and printers) that  they  allege are copying devices under  applicable  laws.  Other
countries that have not imposed levies on  these types  of  devices  are expected  to  extend existing  levy
schemes, and countries that do not currently have  levy schemes may decide  to  impose copyright levies
on these types of devices. If imposed, the total amount of  the  copyright  levies  would depend on the
types of products determined to be subject  to  the levy,  the number  of units of those products sold
during the period covered by the levy,  and the  per  unit fee  for each type of product, all of which may
be affected by several factors, including the outcome of  ongoing litigation  involving HP  and other
industry participants and possible action by the  legislative  bodies in the applicable countries, which
could be substantial. Consequently, the  ultimate  impact  of  these potential  copyright  levies or  similar
fees, and the ability of HP to recover such amounts through increased prices, remain  uncertain.

Due to the international nature of our business,  political or economic  changes or  other factors could harm
our future revenue, costs and expenses  and  financial  condition.

Sales outside the United States make up approximately 64% of our net revenue. In addition,  an

increasing portion of our business activity is being conducted in emerging  markets,  including Brazil,
Russia, India and China. Our future  revenue,  gross margin, expenses and financial condition could
suffer due to a variety of international  factors, including:

(cid:129) ongoing instability or changes in a country’s  or region’s economic or political conditions,

including inflation, recession, interest rate  fluctuations and actual or  anticipated military  or
political conflicts;

(cid:129) longer accounts receivable cycles and financial instability among  customers;

(cid:129) trade regulations and procedures and actions affecting production, pricing and  marketing of

products;

(cid:129) local labor conditions and regulations;

(cid:129) managing a geographically dispersed  workforce;

(cid:129) changes in the regulatory or legal environment;

(cid:129) differing technology standards or customer  requirements;

22

(cid:129) import, export or other business licensing requirements  or requirements  relating to making

foreign direct investments, which could  increase our cost  of  doing business in certain
jurisdictions, prevent us from shipping products to particular countries or  markets,  affect our
ability to obtain favorable terms for components, increase our  operating costs or lead to
penalties or restrictions;

(cid:129) difficulties associated with repatriating  cash generated or held abroad  in a  tax-efficient manner

and changes in tax laws; and

(cid:129) fluctuations in freight costs, limitations on shipping and receiving capacity,  and other  disruptions
in the transportation and shipping infrastructure at important geographic points of exit  and entry
for our products and shipments.

The factors described above also could disrupt our product and  component manufacturing and key
suppliers located outside of the United States.  For  example,  we  rely on manufacturers in Taiwan for  the
production of notebook computers and other suppliers in Asia for  product assembly and manufacture.

As approximately 64% of our sales are from countries outside of the  United States, other

currencies, particularly the euro, the  British  pound, Chinese  Yuan Renminbi  and the  Japanese  yen, can
have an impact on HP’s results (expressed in  U.S. dollars). Currency variations also contribute to
variations in sales of products and services in impacted jurisdictions.  Accordingly,  fluctuations in foreign
currency rates, most notably the strengthening of the dollar against the euro, could have a  material
impact on our revenue growth in future periods. In addition, currency variations can adversely affect
margins on sales of our products in countries outside of the United  States and  margins on sales  of
products that include components obtained from suppliers located  outside of the United States. We use
a combination of forward contracts and options designated as cash flow hedges to protect against
foreign currency exchange rate risks.  The effectiveness of our hedges depends  on our ability to
accurately forecast future cash flows,  which is particularly difficult during  periods of  uncertain demand
for our  products and services and highly  volatile exchange rates. As  a result,  we could incur significant
losses from our hedging activities if our  forecasts are  incorrect. In addition, our hedging activities may
be ineffective or may not offset any or more  than a  portion of  the  adverse financial  impact  resulting
from currency variations. Gains or losses  associated  with hedging activities also  may impact our  revenue
and to a lesser extent our cost of sales  and financial  condition.

In many foreign countries, particularly in those with developing economies, it is common  to  engage

in business practices that are prohibited by  laws and regulations  applicable to us, such as the Foreign
Corrupt Practices Act. Although we implement policies and procedures  designed to facilitate
compliance with these laws, our employees, contractors and agents,  as well  as those  companies to which
we outsource certain of our business operations,  may take actions in  violation of our policies. Any such
violation, even if prohibited by our policies, could have  a material adverse effect on our  business  and
reputation.

If we fail to manage the distribution of our  products  and services properly, our revenue, gross margin and
profitability could suffer.

We  use a variety of different distribution methods to sell  our products and services, including
third-party resellers and distributors and both direct and indirect sales to both enterprise  accounts and
consumers. Successfully managing the  interaction of our direct and indirect  channel  efforts to reach
various potential customer segments for our products and services is a complex process. Moreover,
since each distribution method has distinct  risks and gross  margins, our failure  to  implement the most
advantageous balance in the delivery  model  for our products and services could adversely affect our
revenue and gross margins and therefore our profitability.  Other distribution risks are described below.

23

(cid:129) Our financial results could be materially adversely affected due to channel conflicts  or if  the

financial conditions of our channel partners were to weaken.

Our future operating results may be adversely affected by any conflicts that might  arise between
our  various sales channels, the loss or deterioration of any  alliance  or distribution arrangement
or the loss of retail shelf space. Moreover, some of our  wholesale and retail distributors may
have insufficient financial resources and  may  not  be  able  to withstand  changes in  business
conditions, including economic weakness and industry consolidation. Many of our significant
distributors operate on narrow product  margins and have been negatively  affected by business
pressures. Considerable trade receivables  that are not covered  by collateral or credit insurance
are outstanding with our distribution  and retail channel partners. Revenue from indirect sales
could suffer, and we could experience disruptions in distribution if  our distributors’ financial
conditions, abilities to borrow funds in the credit markets or operations weaken.

(cid:129) Our inventory management is complex as we continue  to  sell  a  significant mix of  products

through distributors.

We  must manage inventory effectively, particularly with respect to sales to distributors, which
involves forecasting demand and pricing issues.  Distributors may increase orders during periods
of product shortages, cancel orders if their inventory is too high  or  delay orders in anticipation
of new products. Distributors also may adjust their orders in response to the supply of our
products and the products of our competitors and seasonal fluctuations in end-user demand. Our
reliance upon indirect distribution methods may reduce visibility  to  demand and  pricing issues,
and therefore make forecasting more difficult. If we  have excess or obsolete  inventory,  we may
have to reduce our prices and write down inventory.  Moreover, our  use of indirect distribution
channels may limit our willingness or ability to adjust prices quickly and  otherwise to respond to
pricing changes by competitors. We also may have limited ability  to  estimate future  product
rebate redemptions in order to price our products  effectively.

If we do not effectively manage our product and services transitions,  our revenue may  suffer.

Many of the industries in which we compete are characterized by rapid technological advances  in
hardware performance and software features  and functionality; frequent  introduction of new products;
short product life cycles; and continual improvement in product price  characteristics relative to product
performance. Among the risks associated  with the introduction of new products and services are  delays
in development or  manufacturing, variations  in costs,  delays in  customer  purchases or  reductions in
price of existing products in anticipation of new introductions, difficulty  in predicting customer demand
for the new offerings and effectively managing  inventory levels  so  that they are  in line with anticipated
demand, risks associated with customer qualification  and  evaluation of new products  and the  risk that
new products may have quality or other  defects or may not be supported  adequately  by  application
software. If we do not make an effective  transition from  existing products  and services to future
offerings, our revenue may decline.

Our revenue and gross margin also may  suffer due to the timing of product or service

introductions by our suppliers and competitors.  This is  especially challenging when  a product  has a
short life cycle or a competitor introduces a  new product just before our  own product introduction.
Furthermore, sales of our new products  and  services may replace sales, or  result in discounting of some
of our current offerings, offsetting the benefit of even a  successful introduction. There also may be
overlaps in the current products and services of HP and portfolios acquired  through mergers and
acquisitions that we must manage. In  addition, it may be difficult  to  ensure performance of new
customer contracts in accordance with our revenue, margin  and cost estimates  and to achieve
operational efficiencies embedded in  our estimates.  Given the  competitive  nature of our industry, if any

24

of these  risks materializes, future demand  for our  products and services and our results of  operations
may suffer.

Our revenue and profitability could suffer  if  we  do not  manage the risks  associated with  our IT services
business properly.

The size  and significance of the IT services portion  of our business  has increased in recent periods.

The risks that accompany that business differ from  those of  our other businesses and include the
following:

(cid:129) The pricing and other terms of some of our IT services  agreements,  particularly our long-term
IT outsourcing services agreements, require us to make estimates and assumptions  at the time
we enter into these contracts that could  differ  from actual results. Any increased or unexpected
costs or unanticipated delays in connection  with the performance of  these engagements,
including delays caused by factors outside  our control, could  make these agreements less
profitable or unprofitable, which would  have an adverse  affect on the profit  margin of our IT
services business.

(cid:129) Some of our IT services agreements  require significant  investment in the early stages  that  is
expected to be recovered through billings over the  life of the agreement.  These agreements
often involve the construction of new IT systems and communications  networks  and the
development and deployment of new technologies. Substantial performance risk  exists in  each
agreement with these characteristics, and some or all elements  of service  delivery under these
agreements are dependent upon successful completion of  the development, construction and
deployment phases. Any failure to perform satisfactorily  under these agreements may  expose us
to legal liability, result in the loss of customers and  harm our reputation, which could decrease
the revenues and profitability of our IT services business.

(cid:129) Some of our outsourcing services agreements contain  pricing provisions that permit a client to
request a benchmark study by a mutually acceptable third- party. The benchmarking process
typically compares the contractual price of our  services against the price of similar services
offered by other specified providers in a  peer comparison group, subject to agreed upon
adjustment and normalization factors. Generally, if the benchmarking study shows that our
pricing has a difference outside a specified range,  and the  difference is not  due  to  the unique
requirements of the client, then the parties will negotiate in good  faith  any  appropriate
adjustments to the pricing. This may result  in the reduction of our rates  for  the benchmarked
services performed after the implementation of those  pricing  adjustments, which could decrease
the revenues and profitability of our IT services business.

If we fail to comply with our customer contracts or government  contracting regulations,  our revenue could
suffer.

Our contracts with our customers may include unique and specialized performance  requirements.
In particular, our contracts with federal, state,  provincial and  local  governmental customers are subject
to various procurement regulations, contract provisions and  other requirements relating to their
formation, administration and performance. Any failure  by us  to  comply with the  specific provisions in
our  customer contracts or any violation of government contracting  regulations could result in the
imposition of various civil and criminal penalties, which may include termination of  contracts, forfeiture
of profits, suspension of payments and, in  the case  of our government  contracts, fines and  suspension
from future government contracting. In  addition, we are currently, and  in the  future may be, subject to
qui tam litigation brought by private  individuals on behalf  of  the government relating  to  our
government contracts, which could include claims for up to  treble damages.  Further, any negative
publicity related to our customer contracts  or any proceedings surrounding them, regardless of its

25

accuracy, may damage our business by affecting our ability to compete  for new contracts.  If our
customer contracts are terminated, if  we are suspended from government work,  or if our  ability to
compete for new contracts is adversely affected,  we could suffer a material reduction in expected
revenue.

We make estimates and assumptions in  connection with the preparation of HP’s Consolidated Financial
Statements, and any changes to those  estimates and assumptions could have  a material adverse effect on
our results of operations.

In connection with the preparation of HP’s Consolidated Financial Statements, we use certain

estimates and assumptions based on historical experience and other factors.  Our most critical
accounting estimates are described in  ‘‘Management’s Discussion and Analysis of Financial Condition
and Results of Operations’’ in this report.  In addition, as  discussed in Note 18 to the Consolidated
Financial Statements, we make certain estimates, including decisions  related  to  provisions for legal
proceedings and other contingencies. While we believe that these  estimates and assumptions  are
reasonable under the circumstances,  they are subject  to  significant uncertainties, some of which are
beyond our control. Should any of these estimates  and assumptions  change or prove to have been
incorrect, it could have a material adverse  effect on  our results of  operations.

Unanticipated changes in HP’s tax provisions,  the adoption of a  new U.S. tax legislation  or exposure to
additional income tax liabilities could affect our profitability.

We  are subject to income taxes in the United States  and  numerous foreign jurisdictions.  Our tax

liabilities are affected by the amounts  we  charge  for  inventory, services, licenses, funding and  other
items in intercompany transactions. We are subject  to  ongoing tax audits in various jurisdictions. Tax
authorities may disagree with our intercompany charges, cross-jurisdictional transfer pricing or other
matters and assess additional taxes. We regularly assess  the likely  outcomes of these audits in order to
determine the appropriateness of our tax provision. However, there can be no assurance that we will
accurately predict the outcomes of these  audits, and the amounts ultimately paid upon resolution of
audits could be materially different from  the amounts previously included in our income tax expense
and therefore could have a material impact on our tax provision, net  income  and cash flows. In
addition, our effective tax rate in the  future  could  be  adversely affected  by  changes to our operating
structure, changes in the mix of earnings in  countries with differing  statutory tax rates,  changes in the
valuation of deferred tax assets and liabilities,  changes in tax laws and the discovery of new information
in the course of our tax return preparation process. In  particular, the carrying value  of  deferred tax
assets, which are predominantly in the  United States, is dependent on our ability to generate  future
taxable income in the United States. In  addition, President Obama’s  administration  has recently
announced proposals for a new U.S.  tax  legislation that, if adopted, could adversely affect our tax  rate.
Any of these changes could affect our  profitability.

Our sales cycle makes planning and inventory  management difficult and future financial results less
predictable.

In some of our segments, our quarterly sales often have reflected a pattern  in which a

disproportionate percentage of each  quarter’s total sales occur  towards the end of such quarter. This
uneven  sales pattern makes prediction  of revenue, earnings, cash  flow from operations  and working
capital for each financial period difficult, increases the  risk  of  unanticipated variations in quarterly
results and financial condition and places  pressure on our inventory management and  logistics systems.
If predicted demand is substantially greater than  orders,  there will be excess inventory. Alternatively, if
orders substantially exceed predicted  demand,  we may not  be  able to fulfill all of the  orders  received in
the last few weeks of each quarter. Other developments  late  in a quarter, such as a systems failure,
component pricing movements, component shortages  or global logistics  disruptions, could adversely

26

impact inventory levels and results of  operations in a  manner that  is disproportionate to the  number of
days in the quarter affected.

We  experience some seasonal trends  in  the sale  of  our  products that  also may produce variations

in quarterly results and financial condition. For example, sales to governments (particularly sales to the
United States government) are often stronger in  the third calendar quarter, consumer sales are  often
stronger in the fourth calendar quarter, and many customers whose fiscal and calendar years are the
same spend their remaining capital budget authorizations in the  fourth  calendar  quarter  prior to new
budget constraints in the first calendar  quarter  of the following year. European sales are often weaker
during the summer months. Demand during the spring and early  summer  also may be adversely
impacted by market anticipation of seasonal trends. Moreover, to the extent  that  we introduce new
products in anticipation of seasonal demand trends,  our discounting of  existing products  may adversely
affect our gross margin prior to or shortly after such product launches.  Typically,  our third fiscal
quarter is our weakest and our fourth fiscal quarter is  our strongest.  Many of the  factors that create
and affect seasonal trends are beyond  our  control.

Any failure by us to execute on our strategy for  operational  efficiency successfully could  result  in  total costs
and expenses that are greater than expected.

We  have adopted an operating framework that includes a  disciplined focus  on operational
efficiency. As part of this framework,  we have adopted  several initiatives, including a multi-year
program announced in 2006 to reduce  real estate  costs by consolidating several  hundred  HP real estate
locations worldwide to fewer core sites, and a multi-year process of  examining every function and every
one of our businesses and functions in order to optimize efficiency and reduce cost. We have also
implemented a workforce restructuring program in  fiscal  2008 relating to our services business and  a
workforce restructuring program in fiscal  2009 relating  to  our product businesses.

Our ability to achieve the anticipated cost savings and other benefits from these initiatives within

the expected time frame is subject to  many estimates  and assumptions,  including  estimates and
assumptions regarding the cost of consolidating real estate  locations, the amount of  accelerated
depreciation or asset impairment to be  incurred when we vacate  facilities or cease using equipment
before the end of their respective lease  term or  asset life, and the costs and  timing of other activities in
connection with these initiatives. These  estimates and assumptions are subject  to  significant economic,
competitive and other uncertainties, some of which are  beyond  our control. In addition, there are
significant risks associated with our workforce restructuring programs,  including potential  delays in  the
implementation of those programs in highly regulated locations  outside of  the United  States,
particularly in Europe and Asia, decreases in  employee morale, and the failure to meet  operational
targets due to the loss of employees.  If  these estimates  and assumptions  are incorrect, if  we experience
delays, or if other unforeseen events  occur, our business and results of  operations could be adversely
affected.

In order to be successful, we must attract, retain and motivate key employees,  and failure to do so could
seriously harm us.

In order to be successful, we must attract, retain and  motivate  executives  and other key employees,
including those in managerial, technical, sales,  marketing and IT support positions. Hiring and retaining
qualified executives, engineers, skilled solutions providers in  the IT support business and qualified sales
representatives are critical to our future, and competition  for experienced employees  in the IT industry
can be intense. The failure to hire executives  and key employees or the loss of executives and key
employees could have a significant impact on our operations.

27

Changes to our compensation and benefit  programs  could adversely  affect  our  ability to  attract and retain
employees.

Like other companies, HP has implemented  changes to its  compensation  programs  intended to

reduce fixed costs, create a high performance culture at all levels  and provide an opportunity  for
employees to earn significant rewards  if  HP delivers strong financial results.  These changes  included
reducing base pay for many employees; lowering the  cap  on matching contributions under the HP
401(k) Plan; making the funding of the  HP 401(k)  Plan  matching contributions  fully discretionary
depending on quarterly business results; and eliminating  the purchase price discount for  shares
purchased under the HP Share Ownership Plan, all of which were announced  in February 2009. HP
also has reduced the total number of share-based payment awards granted to employees and the
number of employees who receive share-based payment awards. Due to these changes in  our
compensation programs, we may find  it  difficult to attract,  retain and motivate employees, and any such
difficulty could materially adversely affect  our  business. Moreover, any difficulty  relating to obtaining
stockholder approval of equity compensation  plans could limit our ability to grant  share-based payment
awards to employees in the future.

Terrorist acts, conflicts and wars may seriously harm  our  business and revenue, costs and  expenses and
financial condition  and stock price.

Terrorist acts, conflicts or wars (wherever located around the  world)  may  cause  damage or

disruption to HP, our employees, facilities,  partners,  suppliers, distributors, resellers or customers. The
potential for future attacks, the national  and international  responses  to  attacks or perceived threats  to
national security, and other actual or potential  conflicts or  wars, including the ongoing military
operations in Iraq and Afghanistan have created many economic and political uncertainties. In
addition, as a major multi national company with headquarters and significant  operations located  in the
United States, actions against or by the  United States  may impact our business  or employees.  Although
it is impossible to predict the occurrences  or consequences  of  any  such events, they could result in a
decrease in demand for our products,  make it  difficult or impossible  to  deliver products to our
customers or to receive components from our suppliers, create delays and inefficiencies in our supply
chain  and result in the need to impose employee  travel restrictions. We are  predominantly uninsured
for losses and interruptions caused by  terrorist acts, conflicts  and wars.

Any failure by us to identify, manage, complete and integrate  acquisitions, divestitures and other  significant
transactions successfully could harm our financial results, business and prospects, and  the costs, expenses
and other financial and operational effects  associated  with managing, completing and integrating
acquisitions may result in financial results that are  different than  expected.

As part of our business strategy, we frequently acquire complementary companies or businesses,

divest  non-core businesses or assets,  enter  into strategic alliances and  joint ventures and  make
investments to further our business (collectively, ‘‘business  combination and investment transactions’’).
In order to pursue this strategy successfully, we must identify  suitable candidates for and  successfully
complete business combination and investment transactions,  some of which may be large and complex,
and manage post-closing issues such  as the integration of acquired companies or  employees. We  may
not fully realize all of the anticipated  benefits  of  any  business combination  and investment  transaction,
and the timeframe for achieving benefits  of a business combination and investment transaction  may
depend  partially upon the actions of employees, suppliers or  other  third parties. In addition, the pricing
and other terms of our contracts for  business combination and investment transactions  require us to
make estimates and assumptions at the  time we enter  into  these  contracts, and, during the course of
our  due diligence, we may not identify all of  the factors necessary  to  estimate our costs accurately. Any
increased or unexpected costs, unanticipated delays  or failure to achieve  contractual obligations could
make these transactions less profitable or  unprofitable. Moreover, if  we  fail to identify and complete

28

successfully business combination and investment  transactions that further our strategic objectives, we
may be required to expend resources to develop products  and technology internally, we  may be at  a
competitive disadvantage or we may be adversely affected by  negative market  perceptions, any  of  which
may have a material adverse effect on  our  revenue, gross  margin and profitability.

Integration issues are complex, time-consuming  and expensive and, without proper planning and
implementation, could significantly disrupt our business. The challenges involved in  integration include:

(cid:129) combining product offerings and entering into new markets in which we  are not experienced;

(cid:129) convincing customers and distributors that the  transaction will not diminish client service

standards or business focus, preventing customers and distributors  from deferring  purchasing
decisions or switching to other suppliers (which could result  in our incurring  additional
obligations in order to address customer uncertainty), minimizing sales  force  attrition and
coordinating sales, marketing and distribution efforts;

(cid:129) consolidating and rationalizing corporate IT infrastructure, which may include multiple legacy

systems from various acquisitions and  integrating software code;

(cid:129) minimizing the diversion of management  attention from ongoing business concerns;

(cid:129) persuading employees that business cultures  are compatible, maintaining employee morale and

retaining key employees, engaging with employee  works councils representing an acquired
company’s non-U.S. employees, integrating employees into HP, correctly estimating employee
benefit costs and implementing restructuring programs;

(cid:129) coordinating and combining administrative,  manufacturing,  research  and  development and  other
operations, subsidiaries, facilities and relationships with  third parties in accordance with local
laws and other obligations while maintaining  adequate standards, controls and  procedures;

(cid:129) achieving savings from supply chain integration;  and

(cid:129) managing integration issues shortly after or  pending the  completion  of other independent

transactions.

Integration and other risks associated with  business combination  and investment transactions can
be more pronounced for larger and more  complicated transactions. For example, in August 2008, we
completed our acquisition of EDS, and we are  in the process of integrating EDS  into  our company.
The size of the acquisition of EDS increases both the scope and consequence  of  ongoing  integration
risks. We may not successfully address  the integration challenges  in a timely  manner,  or at all, and we
may not fully realize all of the anticipated benefits or synergies of the EDS  acquisition.  If we  fail to
realize such anticipated benefits or synergies, our  operating results  could be materially adversely
affected.

Managing business combination and  investment transactions  requires varying levels  of  management

resources, which may divert our attention  from other business operations. These business combination
and investment transactions also have  resulted  and in  the future  may  result in  significant costs and
expenses and charges to earnings, including those related  to  severance pay, early retirement  costs,
employee benefit costs, asset impairment  charges,  charges from the elimination of duplicative facilities
and contracts, in-process research and  development charges,  inventory adjustments, assumed litigation
and other liabilities, legal, accounting  and  financial advisory fees, and  required  payments to executive
officers and key employees under retention plans. Moreover, HP has incurred and  will  incur  additional
depreciation and amortization expense over  the useful lives of certain assets acquired  in connection
with business combination and investment transactions,  and, to the extent that the value of goodwill or
intangible assets with indefinite lives acquired in connection with a business  combination and
investment transaction becomes impaired, we  may  be  required to incur additional material charges

29

relating to the impairment of those assets. In order to complete an acquisition, we may issue common
stock, potentially creating dilution for existing stockholders. In  addition,  we may borrow to finance an
acquisition, and the amount and terms of any potential future acquisition-related  borrowings, as well as
other factors, could affect our liquidity  and financial condition and potentially our credit ratings. Any
potential future downgrades in our credit rating  associated  with an acquisition could adversely affect
our  ability to borrow and cost of borrowing  and result in more  restrictive borrowing terms.  In addition,
HP’s effective tax rate on an ongoing  basis is  uncertain,  and  business combination and investment
transactions could  impact our effective tax rate. We also may experience risks relating  to  the challenges
and costs of closing a business combination  and  investment transaction and the risk that an announced
business combination and investment  transaction may not close.  As a result, any completed,  pending  or
future transactions may contribute to  financial results that differ from the investment community’s
expectations in a given quarter.

Unforeseen environmental costs could impact our future net earnings.

We  are subject to various federal, state, local  and foreign  laws and regulations concerning

environmental protection, including laws  addressing the discharge of pollutants into the air and water,
the management and disposal of hazardous substances and wastes, the  cleanup  of contaminated sites,
the content of our products and the recycling, treatment and disposal  of  our products  including
batteries. In particular, we face increasing  complexity in  our product design  and procurement
operations as we adjust to new and future requirements relating to the chemical and materials
composition of our products, their safe use, the  energy consumption associated with those products  and
product  take-back legislation. We could incur  substantial costs, our  products could be restricted  from
entering certain jurisdictions, and we  could face  other sanctions,  if we were to violate  or become liable
under environmental laws or if our products  become non-compliant with environmental laws. Our
potential exposure includes fines and  civil  or  criminal sanctions, third-party property  damage or
personal injury claims and clean up costs.  Further, liability under some environmental laws relating to
contaminated sites can be imposed retroactively, on a joint and several basis, and without any  finding
of noncompliance or fault. The amount  and timing of costs under environmental laws are difficult to
predict.

Some anti-takeover provisions contained in  our  certificate of incorporation  and bylaws, as  well as provisions
of Delaware law, could impair a takeover  attempt.

We  have provisions in our certificate  of  incorporation and bylaws, each of which  could  have the

effect of rendering more difficult or  discouraging an acquisition of  HP deemed undesirable by our
Board of Directors. These include provisions:

(cid:129) authorizing blank check preferred stock, which HP could issue with voting, liquidation, dividend

and other rights superior to our common stock;

(cid:129) limiting the liability of, and providing indemnification to, HP’s directors and officers;

(cid:129) specifying that HP stockholders may take action only at a duly called  annual or special meeting

of stockholders and otherwise in accordance with  our  bylaws and  limiting the ability of our
stockholders to call special meetings;

(cid:129) requiring advance notice of proposals by HP stockholders  for business to be conducted at

stockholder meetings and for nominations of  candidates for election to our Board  of  Directors;

(cid:129) requiring a vote by the holders of two-thirds  of HP’s outstanding  shares to amend certain bylaws

relating to HP stockholder meetings, the Board of Directors  and indemnification; and

(cid:129) controlling the procedures for conduct  of HP Board and stockholder  meetings and election,

appointment and removal of HP directors.

30

These provisions, alone or together,  could  deter or  delay hostile takeovers,  proxy contests  and
changes in control or management of HP. As a  Delaware corporation, HP  also is  subject to provisions
of Delaware law, including Section 203 of the Delaware General Corporation Law,  which prevents
some stockholders from engaging in certain business combinations without approval  of the holders of
substantially all of HP’s outstanding common  stock.

Any provision of our certificate of incorporation or bylaws or  Delaware law that has the effect of

delaying or deterring a change in control of  HP could limit the opportunity  for our stockholders to
receive a premium for their shares of  HP common stock and also could  affect the price that some
investors are willing to pay for HP common  stock.

ITEM 1B. Unresolved Staff Comments.

Not applicable.

ITEM 2. Properties.

As of October 31, 2009, we owned or  leased a total of approximately 77 million  square feet of

space worldwide. We owned 45% of this space and leased the remaining 55%. Included  in these
amounts are 10 million square feet of  vacated  space, of which 3 million square feet  is leased to non  HP
interests. We believe that our existing properties are  in good condition  and  are suitable for  the conduct
of our business.

As of October 31, 2009, HP core sales and support operations occupied approximately 12 million

square  feet. We own 40% of the space  used  for sales and support activities and  lease the remaining
60%.

HP core manufacturing plants, research and development facilities and warehouse and
administrative facilities occupied approximately  55 million square feet. We  own 46% of our
manufacturing, research and development,  warehouse  and administrative space  and lease  the remaining
54%. Our plants are equipped with machinery, most of  which we own and which,  in part,  we developed
to meet the special requirements of our manufacturing  processes. At the end of fiscal 2009, we are
continuing to execute on our plan to reduce our real estate  costs  and increase our productive
utilization by consolidating several hundred HP core real estate locations worldwide.

As indicated above, we have seven business segments: Services,  ESS,  HP Software, PSG,  IPG,
HPFS, and Corporate Investments. Because of  the interrelation of these segments, a majority  of these
segments use substantially all of the properties at least in  part, and we retain  the flexibility to use each
of the properties in whole or in part  for each of  the segments.

Principal Executive Offices

Our principal executive offices, including our  global headquarters, are located at  3000 Hanover

Street, Palo Alto, California, United States of  America.

Headquarters of Geographic Operations

The locations of our headquarters of  geographic operations at October  31, 2009 were as  follows:

Americas
Houston, United States
Miami, United States
Mississauga, Canada

Europe, Middle East, Africa
Geneva, Switzerland

Asia Pacific
Singapore
Tokyo, Japan

31

Product  Development and Manufacturing

The locations of our major product development and manufacturing facilities and HP Labs at

October 31, 2009 were as follows:

Americas

Europe, Middle  East, Africa

Hewlett-Packard Laboratories

Aguadilla, Puerto Rico

Leixlip, Ireland

Bangalore, India

Cupertino, San Diego and Woodland,
California

Kiryat-Gat and  Netanya,
Israel

Beijing,  China

Colorado Springs and Ft Collins,
Colorado

Amersfoort,  The Netherlands

Bristol, United Kingdom

Haifa, Israel

Boise, Idaho

Asia Pacific, including Japan

Palo  Alto,  United  States

Indianapolis, Indiana

Shanghai, China

St. Petersburg, Russia

Andover and Marlboro, Massachusetts Udham Singh  Nagar, India

Minnetonka, Minnesota

Tokyo, Japan

Corvallis, Oregon

Singapore

LaVergne and Memphis, Tennessee

Houston, Texas

Sandston, Virginia

Vancouver, Washington

ITEM 3. Legal Proceedings.

Information with respect to this item may be found in  Note 18  to  the Consolidated Financial

Statements in Item 8, which is incorporated  herein  by reference.

ITEM 4. Submission of Matters to a  Vote  of Security Holders.

Not applicable.

32

PART II

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases

of Equity Securities.

Information regarding the market prices of  HP common stock and the markets for that stock may

be found in the ‘‘Quarterly Summary’’  in Item 8  and on the cover page of this Annual Report on
Form 10-K, respectively, which are incorporated  herein  by reference. We  have declared and paid cash
dividends each fiscal year since 1965.  The  trend has  been to declare $0.16 per share  every  first  and
third quarters and to pay $0.08 per share  per  quarter. As of  November 30,  2009, there were
approximately 126,600 stockholders of  record. Additional  information concerning dividends may be
found in ‘‘Selected Financial Data’’ in  Item  6 and in Item 8,  which are incorporated herein by
reference.

Recent  Sales of Unregistered Securities

There were no unregistered sales of equity  securities in fiscal 2009 that have not been previously

reported in a Quarterly Report on Form  10-Q.

Issuer  Purchases of Equity Securities

Period

Month #1

Total Number
of Shares
Purchased

Average
Price Paid
per Share

Total Number of
Shares Purchased
as Part of Publicly
Announced
Plans or Programs

Approximate
Dollar Value of Shares
that May Yet Be
Purchased  under  the
Plans or  Programs

In thousands, except per share amounts

(August 2009) . . . . . . . . . . . . . . . . .

17,589

$43.78

17,589

$5,286,004

Month #2

(September 2009) . . . . . . . . . . . . . . .

20,889

$45.60

20,889

$4,333,424

Month #3

(October 2009) . . . . . . . . . . . . . . . . .

7,972

$47.54

7,972

$3,954,407

Total . . . . . . . . . . . . . . . . . . . . . . . . . .

46,450

$45.24

46,450

HP repurchased shares in the fourth quarter of fiscal 2009 under an ongoing  program to manage

the dilution created by shares issued  under employee  stock  plans as well as to repurchase shares
opportunistically. This program, which  does not have a  specific expiration date,  authorizes repurchases
in the open market or in private transactions. All shares repurchased in the fourth quarter of fiscal
2009 were purchased in open market  transactions.

As of October 31, 2009, HP had remaining authorization of approximately $4.0 billion for future

share repurchases under the $8.0 billion  repurchase authorization approved  by  the HP Board  of
Directors on September 19, 2008.

On November 19, 2009, HP’s Board  of Directors authorized  an additional  $8.0 billion  for future

share repurchases.

33

Stock Performance Graph and Cumulative Total Return

The graph below shows the cumulative  total stockholder return assuming  the investment of $100

on the date specified (and the reinvestment  of  dividends  thereafter) in each of HP common stock, the
S&P 500 Index, and the S&P Information Technology Index.(1) The comparisons in the graph below  are
based upon historical data and are not  indicative of, or intended to forecast, future  performance of our
common stock.

$350

$300

$250

$200

$150

$100

$50

$0

10/04

10/05

10/06

10/07

10/08

10/09

Hewlett-Packard Company

S&P 500

24NOV200921125398
S&P Information Technology

Hewlett-Packard Company . . . . . . . . . . . . . . . . .
S&P 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
S&P Information Technology . . . . . . . . . . . . . . .

100.00
100.00
100.00

152.39
108.72
105.43

212.65
126.49
115.90

285.77
144.90
147.08

213.09
92.60
86.47

266.66
101.68
113.71

10/04

10/05

10/06

10/07

10/08

10/09

(1) The stock performance graph does not include HP’s peer group because  peer group information is

represented and included in the S&P  Information  Technology Index.

34

ITEM 6. Selected Financial Data.

The information set forth below is not necessarily  indicative  of  results of future operations and

should be read in conjunction with Item  7, ‘‘Management’s Discussion and  Analysis  of Financial
Condition and Results of Operations,’’  and the Consolidated Financial Statements and notes thereto
included in Item 8, ‘‘Financial Statements  and Supplementary Data,’’ of this Form  10-K, which are
incorporated herein by reference, in order to understand further the factors that may  affect the
comparability of the financial data presented below.

HEWLETT-PACKARD COMPANY AND  SUBSIDIARIES
Selected Financial Data

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from operations(1)
. . . . . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings per share

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared per share . . . . . . . . . . .
At year-end:

For the fiscal years ended October 31,

2009(2)

2008

2007

2006

2005

$114,552
$ 10,136
7,660
$

In millions, except per share amounts
$91,658
$118,364
$ 6,560
$ 10,473
$ 6,198
8,329
$

$104,286
8,719
$
7,264
$

$86,696
$ 3,473
$ 2,398

$
$
$

3.21
3.14
0.32

$
$
$

3.35
3.25
0.32

$
$
$

2.76
2.68
0.32

$
$
$

2.23
2.18
0.32

$
$
$

0.83
0.82
0.32

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . .

$114,799
$ 13,980

$113,331
7,676
$

$ 88,699
4,997
$

$81,981
$ 2,490

$77,317
$ 3,392

(1) Earnings from operations include the following  items:

2009

2008

2007

2006

2005

Amortization of purchased intangible assets . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . .
In-process research and development charges . . . . . . . .
Pension curtailments and pension settlements, net
. . . .
Acquisition-related charges . . . . . . . . . . . . . . . . . . . . .

$1,571
640
7
—
242

In millions
$ 783
$ 967
387
270
45
190
— (517)
—
41

$ 604
158
52
—
—

$ 622
1,684
2
(199)
—

Total charges before taxes . . . . . . . . . . . . . . . . . . . . . .

$2,460

$1,323

$ 843

$ 814

$2,109

Total charges, net of taxes . . . . . . . . . . . . . . . . . . . . . .

$1,733

$ 973

$ 690

$ 604

$1,509

(2)

In the fourth quarter of fiscal 2009, HP early adopted  Financial Accounting Standards Board
(‘‘FASB’’) Accounting Standards Update (‘‘ASU’’) No. 2009-13, ‘‘Multiple-Deliverable Revenue
Arrangements’’ and FASB ASU No. 2009-14, ‘‘Certain Revenue Arrangements That Include
Software Elements.’’ HP adopted these  standards as of the beginning of fiscal 2009. As a result,
fiscal 2009 net revenues and net earnings were higher by $255  million and $55 million,  respectively.

35

ITEM 7. Management’s Discussion and  Analysis  of Financial Condition and Results of  Operations.

HEWLETT-PACKARD COMPANY AND  SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

The following discussion should be read in conjunction  with the  Consolidated Financial  Statements

and the related notes that appear elsewhere in this document.

OVERVIEW

We  are a leading global provider of products, technologies, software, solutions and services to
individual consumers, small- and medium-sized  businesses, and large enterprises, including customers in
the government, health and education sectors. Our  offerings span:

(cid:129) multi-vendor customer services, including infrastructure technology and business process

outsourcing, technology support and maintenance, application development  and support  services,
and consulting and integration services;

(cid:129) enterprise information technology  infrastructure, including enterprise storage and server

technology, networking products and resources, and software that  optimizes business technology
investments;

(cid:129) personal computing and other access devices;  and

(cid:129) imaging and printing-related products and services.

We  have seven business segments for financial  reporting purposes: Services, Enterprise Storage  and

Servers (‘‘ESS’’), HP Software, the Personal  Systems Group  (‘‘PSG’’),  the Imaging and Printing  Group
(‘‘IPG’’), HP Financial Services (‘‘HPFS’’), and Corporate Investments. Services, ESS and  HP Software
are reported collectively as a broader  HP  Enterprise Business (formerly  referred to as  the Technology
Solutions Group). While the HP Enterprise  Business is  not  an operating  segment, we  sometimes
provide financial data aggregating the segments within it  in order  to  provide a supplementary view of
our  business.

Our strategy and operations are currently focused on the following initiatives:

Competitive Positioning

We  are positioning our businesses to take advantage of important trends in the markets for our
products and services. For example, we  are  aligning our  printing  business  to  capitalize on  key  market
trends  such as the shift from analog to digital printing and the growth in printable  content by
developing innovative products for consumers such  as the first  web-connected home printer, working to
enable web and mobile printing, expanding our  presence in  high-usage annuity  businesses including
graphics and retail photo printing, and growing  our  managed print services business. We  are also
positioning our enterprise business to  capitalize on  the trend  towards converged infrastructure  products
that integrate storage, networking, servers and management software. In  addition,  we have developed
IT management software offerings that  seek to satisfy the increasing demand for virtualization
management and increased automation.

Driving Operational Efficiency

We  have implemented an ongoing program to optimize efficiency and  reduce cost across  the

company. As part of those efforts, we  are  continuing to execute on our multi-year  program to
consolidate real estate locations worldwide to fewer  core sites in  order to  reduce our IT spending and

36

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

real estate costs. In addition, we are  continuing  to  implement  the restructuring plan announced in the
fourth quarter of fiscal 2008 to optimize the cost structure of our services business and the
restructuring plan announced in May 2009  to  structurally change and improve the  effectiveness of
several of our product businesses. See  Note 8 to the Consolidated Financial Statements in Item 8 for
further discussion of these restructuring plans  and  the associated  restructuring charges.

We  also took actions in fiscal  2009 to  further improve our cost structure and further  shift our
employee compensation structure from  fixed to variable. As part of those actions,  we reduced base pay
for many of our employees, we reduced the  matching contributions under the HP  401(k) Plan for all
U.S. employees and began funding these matching contributions quarterly on  a discretionary basis
based on our financial performance, and  we modified our employee stock purchase plan to eliminate
the discount applicable to purchases made under the plan.  We are continuing to evaluate our
businesses and market conditions and may consider  additional  restructuring or other actions  in future
periods.

Investing for Growth

We  are investing some of the savings  derived from  our efficiency initiatives  for growth. For

example, we are increasing our sales coverage to expand  the size of the market that we  cover, including
expanding into emerging markets such  as  China, India  and Brazil.  We are creating innovative new
products and developing new channels to connect with our customers,  particularly in our PC business.
In addition, we are expanding our portfolio of products and services that we can  offer to our
customers, both through acquisitions  and through organic growth. A critical component of this strategy
was our acquisition of Electronic Data  Systems Corporation (‘‘EDS’’) in August 2008, which has
increased the size  and breadth of our  services business and enabled us  to provide comprehensive IT
product  and services solutions to our customers.

In November 2009, we entered into a definitive agreement  to  acquire 3Com Corporation, a  global
enterprise provider of networking switching, routing and security solutions, at a price  of $7.90 per share
in cash or an enterprise value of approximately $2.7 billion. The  acquisition  is subject to customary
closing conditions, including the receipt  of domestic  and  foreign regulatory approvals and the approval
of 3Com’s stockholders. The transaction  is expected to close  in our second fiscal quarter of 2010.

Leveraging our Portfolio and Scale

We  now offer one of the IT industry’s broadest  portfolios of products and services, and we are
working to leverage that portfolio as a strategic advantage. For example, in our enterprise business, we
are able to provide servers, storage and networking packaged with services that can be delivered to
customers in the manner of their choosing, be it in-house, outsourced  or as a service via the Internet.
Our portfolio of management software  completes the  package by  allowing  our customers to manage
their IT operations in an efficient and  cost-effective manner. In  addition, we are working to optimize
our  supply chain by eliminating complexity, reducing fixed costs, and leveraging our scale to ensure the
availability of components at favorable  prices  even  during shortages. We are also expanding our use of
industry standard components in our  enterprise products to further leverage our scale.

37

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

The following provides an overview of our key fiscal 2009 financial metrics  and demonstrates how

our  execution of these initiatives has translated into  financial  performance:

Net revenue . . . . . . . . . . . . . .
Year-over-year net revenue %

(decrease) increase . . . . . . .
Earnings from operations . . . . .
Earnings from operations as a

% of net revenue . . . . . . . .
Net earnings . . . . . . . . . . . . .
Net earnings per share

Basic . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . .

HP Enterprise Business

HP
Consolidated

Services

ESS

HP
Software

Total

PSG

IPG

HPFS

$114,552

$34,693 $15,359

$3,572

$53,624 $35,305

$24,011

$2,673

In millions, except per share amounts

(3.2)% 65.4% (20.8)% (15.4)% 20.2% (16.5)% (18.9)% (0.9)%

$ 10,136

$ 5,044 $ 1,518

$ 684

$ 7,246 $ 1,661

$ 4,310

$ 206

8.8%

14.5%

9.9% 19.1% 13.5%

4.7%

18.0%

7.7%

$

$
$

7,660

3.21
3.14

Cash and cash equivalents at October 31,  2009 totaled $13.3  billion, an increase  of $3.1 billion

from the October 31, 2008 balance of $10.2 billion. The increase  for fiscal 2009 was due primarily to
$13.4 billion of cash provided from operations  and $1.8 billion of  proceeds from the  issuance  of
common stock under employee stock  plans, which  were partially  offset by $5.1 billion of cash used to
repurchase common stock, $3.2 billion  net investment  in property, plant and equipment, and
$2.8 billion net payment of our debt.

We  intend the discussion of our financial condition and results of operations  that  follows  to
provide information that will assist in  understanding  our Consolidated  Financial Statements,  the
changes in certain key items in those  financial  statements  from year to year, and  the primary factors
that accounted for those changes, as  well as how  certain accounting principles, policies and estimates
affect our Consolidated Financial Statements.

The discussion of results of operations at the consolidated level is followed by a more  detailed

discussion of results of operations by segment.

For a  further discussion of trends, uncertainties  and  other  factors  that could impact our operating
results, see the section entitled ‘‘Risk Factors’’ in Item  1A, which  is incorporated herein by reference.

CRITICAL ACCOUNTING POLICIES  AND  ESTIMATES

General

The Consolidated Financial Statements of HP are prepared in accordance  with U.S. generally

accepted accounting principles (‘‘GAAP’’), which  require management  to  make estimates, judgments
and assumptions that affect the reported amounts  of  assets, liabilities, net revenue and expenses,  and
the disclosure of contingent assets and liabilities. Management bases its estimates on historical
experience and on various other assumptions  that it believes  to  be  reasonable under  the circumstances,
the results of which form the basis for making judgments  about the  carrying values of assets  and
liabilities that are not readily apparent  from  other  sources.  Senior management  has discussed the
development, selection and disclosure of  these estimates with  the Audit  Committee of HP’s Board of
Directors. Management believes that the  accounting  estimates employed and the resulting balances are

38

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

reasonable; however, actual results may  differ  from these estimates under different  assumptions or
conditions.

An accounting policy is deemed to be critical if  it  requires an accounting estimate to be made
based on assumptions about matters that  are highly uncertain at the time the estimate is made, if
different estimates reasonably could have been used, or if  changes in the  estimate that are  reasonably
possible could materially impact the financial  statements.  Management believes the following critical
accounting policies reflect the significant  estimates and assumptions used in the preparation of  the
Consolidated Financial Statements.

Revenue Recognition

We  enter into contracts to sell our products and services, and,  while the majority  of our  sales
agreements contain standard terms and conditions, there are agreements that  contain multiple elements
or non-standard terms and conditions.  As  a  result, significant contract  interpretation is sometimes
required to determine the appropriate  accounting, including  whether the deliverables  specified in a
multiple element arrangement should be treated  as separate units of accounting for revenue  recognition
purposes, and, if so, how the price should be allocated among the  elements and when to recognize
revenue for each element. We recognize  revenue  for delivered elements only when the delivered
elements have standalone value, uncertainties  regarding customer  acceptance  are resolved and there are
no customer-negotiated refund or return rights for the delivered  elements. If the arrangement includes
a customer-negotiated refund or return  right relative to the delivered item and  the delivery and
performance of the undelivered item  is  considered  probable and substantially in our  control, the
delivered element constitutes a separate unit of accounting.  Changes in the allocation of the sales price
between elements  may impact the timing  of revenue  recognition but  will not  change the total revenue
recognized on the contract.

We  recognize revenue as work progresses on certain fixed-price contracts, such as consulting
arrangements. Using a proportional performance  method, we estimate the total expected labor costs in
order to determine the amount of revenue earned to date. We follow this basis because reasonably
dependable estimates of the labor costs applicable to various stages of a contract can be made. Total
contract profit is subject to revisions throughout the  life of the contract. We record changes in revenue
to income, as a result of revisions to  cost estimates,  in  the period in  which the facts that give rise to the
revision become known.

We  recognize revenue on certain design and build (design, development and/or  construction of
software and/or systems) projects using the  percentage-of-completion method. We  use the cost-to-cost
method of measurement towards completion  as determined by the percentage of cost incurred to date
to the total estimated costs of the project. In  circumstances  when reasonable and reliable cost estimates
for a project cannot be made, we recognize revenue  using the completed contract method.

We  record estimated reductions to revenue for customer and distributor programs and incentive
offerings, including price protection, promotions, other  volume-based incentives and expected returns.
Future market conditions and product  transitions may require us to take actions to increase customer
incentive offerings, possibly resulting  in an incremental reduction of revenue at the time the incentive  is
offered. Additionally, certain incentive programs  require us to estimate, based on historical experience,
the number of customers who will actually redeem the  incentive.

In October 2009, the Financial Accounting Standards  Board  (‘‘FASB’’) issued Accounting

Standards Update (‘‘ASU’’) No. 2009-13,  ‘‘Multiple-Deliverable Revenue Arrangements’’

39

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

(‘‘ASU 2009-13’’). The new standard changes the  requirements for establishing  separate units of
accounting in a multiple element arrangement  and  requires  the allocation of arrangement consideration
to each deliverable based on the relative  selling price. The selling price  for each  deliverable is based on
vendor-specific objective evidence (‘‘VSOE’’) if available, third-party evidence (‘‘TPE’’) if VSOE is  not
available, or estimated selling price (‘‘ESP’’) if neither VSOE  nor TPE is available.

Concurrently to issuing ASU 2009-13, the FASB  also issued  ASU No. 2009-14,  ‘‘Certain Revenue

Arrangements That Include Software Elements’’  (‘‘ASU  2009-14’’).  ASU 2009-14  excludes  software that
is contained on a tangible product from the scope of software revenue guidance if the  software is
essential to the tangible product’s functionality.

HP early adopted the provisions of ASU 2009-13 and  ASU 2009-14 as of the beginning of fiscal

2009 for new and materially modified  deals originating after November 1, 2008; therefore the
previously reported quarterly results have  been  restated to reflect the impact of adoption.

We  establish VSOE of selling price using the  price  charged for a deliverable when sold separately

and, in rare instances, using the price  established by management having the relevant authority. TPE of
selling price is established by evaluating  largely similar and  interchangeable competitor products  or
services in standalone sales to similarly  situated customers. The best estimate of selling price is
established considering internal factors  such as margin objectives,  pricing practices and controls,
customer segment pricing strategies and  the  product lifecycle. Consideration is also given to market
conditions such as competitor pricing  strategies and industry technology lifecycles. When determining
our  best estimate of selling price, we  apply management  judgment when establishing margin objectives
and pricing strategies and evaluating market conditions and product  lifecycles.  We may modify or
develop new go-to-market practices in  the  future. As these go-to-market strategies evolve, we may
modify  our pricing practices in the future,  which may result in changes in selling prices, impacting both
VSOE and ESP. The aforementioned  factors may result in a different allocation of revenue to the
deliverables in multiple element arrangements  from the  current fiscal  year, which may change the
pattern and timing of revenue recognition  for these elements but will not change the total revenue
recognized for the arrangement.

The adoption of ASU 2009-13 and ASU 2009-14 was  not  material to our  financial results,
increasing net revenues and net earnings  by  $255 million and $55 million, respectively for fiscal 2009.
The primary driver of the impact was  the number of new or materially  modified deals, particularly
impacting the second half of the fiscal year, which was driven by economic and customer-specific
factors. An additional driver of the impact was the  extent of hardware or shorter-term service projects
sold into longer-term complex service arrangements in a  particular quarter, which may vary significantly
on a deal-by-deal basis. We are not able  to  reasonably estimate the effect of adopting these standards
on future financial periods as the impact will vary based on the nature and volume of new or materially
modified deals in any given period.

Business Combinations

We  allocate the purchase price of acquired  companies to the tangible assets  acquired, liabilities
assumed and intangible assets acquired, including in-process  research and  development (‘‘IPR&D’’),
based on their estimated fair values.  The excess of the purchase price over these fair values  is recorded
as goodwill. We engage independent third-party appraisal firms to assist  us in determining the fair
values of assets acquired and liabilities assumed. Such valuations require management to make
significant estimates and assumptions,  especially with  respect to intangible assets. The significant

40

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

purchased intangible assets recorded by us include customer contracts and lists, developed and core
technology and the Compaq trade name. The fair values assigned to the identified intangible assets are
discussed in detail in Note 7 to the Consolidated Financial Statements in Item 8.

Critical estimates in valuing certain intangible assets include but are not limited to: future expected

cash flows from customer contracts, customer lists, distribution agreements,  and acquired developed
technologies and patents; expected costs  to develop IPR&D  into  commercially viable products and
estimating cash flows from projects when  completed;  Compaq brand awareness and market  position, as
well as assumptions about the period of  time the brand will continue to be used in our product
portfolio; and discount rates. Management’s estimates of fair value are  based upon assumptions
believed to be reasonable, but which  are  inherently  uncertain and unpredictable and, as a result, actual
results may differ from estimates.

Other estimates associated with the accounting for acquisitions may change as  additional
information becomes available regarding  the assets acquired and liabilities assumed, as more fully
discussed in Note 6 to the Consolidated  Financial Statements in Item 8.

Restructuring

We  have engaged, and may continue to engage,  in restructuring actions, which require
management to utilize significant estimates  related to expenses for severance and other  employee
separation costs, realizable values of  assets  made redundant or obsolete, lease  cancellation and other
exit costs. If the actual amounts differ  from our estimates, the amount of the  restructuring charges
could be materially impacted. For a full description of our restructuring actions, refer to our discussions
of restructuring in the Results of Operations section and Note 8 to the  Consolidated Financial
Statements in Item 8, which are incorporated  herein by reference.

Stock-Based Compensation Expense

We  recognize stock-based compensation expense for  all share-based payment awards, net of an

estimated forfeiture rate. We recognize compensation cost  for only those shares expected to vest  on a
straight-line basis over the requisite service  period of the  award.

Determining the appropriate  fair value model and calculating the fair value  of share-based

payment awards requires subjective assumptions,  including  the expected life of the share-based payment
awards and stock price volatility. We  utilize the  Black-Scholes option pricing model to value the stock
options granted under our principal option  plans. To implement this model, we examined our historical
pattern of option exercises to determine if there were  any discernable  activity patterns  based on certain
employee populations. From this analysis,  we identified three employee populations to which to apply
the Black-Scholes model. We determined  that implied volatility calculated based on actively traded
options on HP common stock is a better  indicator of expected volatility and future  stock price trends
than historical volatility. Therefore, expected volatility used  in the Black-Scholes  option pricing model
in fiscal years 2009, 2008 and 2007 was based  on market-based implied volatility.

We  issue performance-based restricted units  (‘‘PRUs’’)  representing hypothetical  shares of HP

common stock. Each PRU award reflects  a  target number  of shares  that may be issued to the award
recipient. We determine the actual number of shares the recipient receives at the  end of a three-year
performance period based on results  achieved versus goals based on our annual  cash flow from
operations as a percentage of revenue and average total shareholder return (‘‘TSR’’) relative to the
S&P 500 over the performance period.  We use historic  volatility for PRU awards as implied volatility

41

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

cannot be used when simulating multivariate  prices for companies in the  S&P 500. We estimate the fair
value of PRUs using the Monte Carlo simulation model,  as  the TSR modifier contains  a market
condition. We update the estimated expense,  net of forfeitures, for the  cashflow performance against
the goal for that year at the end of each reporting period.

The assumptions used in calculating the fair value of  share-based payment  awards represent
management’s best estimates, but these  estimates involve inherent uncertainties and  the application of
management judgment. As a result, if  factors change and we  use different assumptions, our stock-based
compensation expense could be materially different in the future. In addition, we are required  to
estimate the expected forfeiture rate and recognize  expense only for those shares expected to vest.  If
our  actual forfeiture rate is materially  different from  our estimate, the stock-based compensation
expense could be significantly different  from what  we have recorded in the current period. See Note 2
to the Consolidated Financial Statements in Item 8 for  a further discussion on stock-based
compensation.

Taxes on Earnings

We  calculate our current and deferred tax provisions based on estimates and assumptions that
could differ from the actual results reflected in our income tax returns filed during the subsequent  year.
We  record adjustments based on filed returns  when we have  identified and finalized them, which is
generally in the third and fourth quarters  of the subsequent year for U.S. federal and state  provisions,
respectively.

We  recognize deferred tax assets and liabilities for the  expected tax consequences of temporary
differences between the tax bases of  assets and liabilities  and their reported amounts using enacted tax
rates in effect for the year in which we  expect  the differences to reverse. We record a valuation
allowance to reduce the deferred tax  assets to the amount that we are more likely than not to realize.
We  have considered future market growth, forecasted earnings, future taxable income, the mix of
earnings in the jurisdictions in which  we operate and  prudent and feasible tax planning strategies in
determining the need for a valuation  allowance.  In the event we  were to determine that we would not
be able to realize all or part of our net deferred tax assets in the future, we would increase the
valuation allowance and make a corresponding  charge to earnings in the period in which we make such
determination. Likewise, if we later determine  that we are more likely than not to realize the net
deferred tax assets, we would reverse the  applicable portion of the previously provided valuation
allowance. In order for us to realize  our  deferred tax  assets,  we must be able to generate sufficient
taxable income in the tax jurisdictions  in which  the deferred tax assets are located.

Our effective tax rate includes the impact  of certain  undistributed foreign earnings for which we

have not provided U.S. taxes because we  plan to reinvest such earnings indefinitely outside the United
States. We plan foreign earnings remittance amounts based on projected cash flow needs as well  as the
working capital and long-term investment requirements of our foreign subsidiaries and our domestic
operations. Based on these assumptions,  we estimate the  amount  we will distribute to the United States
and provide the U.S. federal taxes due  on these amounts. Further,  as a result  of certain employment
actions and capital investments we have  undertaken, income from manufacturing activities in certain
countries is subject to reduced tax rates, and in some cases is wholly exempt  from taxes, for fiscal years
through 2022. Material changes in our estimates of cash,  working capital  and long-term investment
requirements in the various jurisdictions  in  which we do  business could  impact our effective tax rate.

42

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

We  are subject to income taxes in the United States and over sixty foreign  countries, and  we are
subject to routine corporate income tax  audits in many  of  these jurisdictions. We believe that our tax
return  positions are fully supported,  but  tax authorities are likely to challenge certain positions, which
may not be fully sustained. However, our income tax expense includes  amounts intended to satisfy
income tax assessments that result from these  challenges. Determining  the income tax  expense for these
potential assessments and recording the  related assets  and liabilities requires management judgments
and estimates. We evaluate our uncertain tax  positions in accordance with the guidance for accounting
for uncertainty in income taxes. We believe that  our reserve for uncertain  tax positions, including
related interest, is adequate. The amounts  ultimately paid upon resolution of audits could be materially
different from the amounts previously  included in our income tax expense  and therefore  could  have a
material impact on our tax provision, net  income and cash flows. Our  reserve for uncertain tax
positions is attributable primarily to uncertainties  concerning the tax treatment of  our international
operations, including the allocation of  income  among different jurisdictions, and related interest.  We
review our reserves quarterly, and we may adjust  such reserves because of proposed assessments by tax
authorities, changes in facts and circumstances, issuance  of  new regulations or new case law, previously
unavailable information obtained during the  course of an examination, negotiations between tax
authorities of different countries concerning our  transfer prices, execution of Advanced Pricing
Agreements, resolution with respect to individual audit  issues, the resolution of entire audits,  or the
expiration of statutes of limitations.

Allowance for Doubtful Accounts

We  determine our  allowance for doubtful accounts using a combination of factors to ensure that

we have not overstated our trade and  financing receivables  balances due to uncollectibility. We
maintain an allowance for doubtful accounts for all customers based on a variety of factors, including
the use of third-party credit risk models  that generate quantitative measures of default probabilities
based on market factors, the  financial  condition of  customers, the length of time receivables are past
due, trends in overall weighted-average  risk  rating of the total portfolio, macroeconomic conditions,
significant one-time events and historical experience. Also, we record specific provisions for individual
accounts when we become aware of specific customer circumstances, such as in the case of bankruptcy
filings or deterioration in the customer’s operating results  or financial position. If circumstances related
to customers change, we would further  adjust our  estimates of the recoverability of receivables either
upward or downward. The annual general  provision for  doubtful accounts has averaged approximately
0.06% of net revenue over the last three  fiscal  years.  Using  our third-party credit risk model at
October 31, 2009, a 50-basis-point deterioration in the  weighted-average default probabilities of our
significant customers would have resulted in an approximately $36 million increase to our trade
allowance at the end of fiscal year 2009.

Inventory

We  state our inventory at the lower of cost or market. We make  adjustments to reduce the cost of

inventory to its net realizable value, if  required, at the product group level  for estimated excess,
obsolescence or impaired balances. Factors influencing these adjustments include changes in demand,
rapid technological changes, product life cycle and development plans, component cost trends, product
pricing, physical deterioration and quality  issues. Revisions to these adjustments would  be  required if
these factors differ from our estimates.

43

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

Valuation of Goodwill and Purchased Intangible  Assets

We  review goodwill and purchased intangible assets with indefinite lives for  impairment annually

and whenever events or changes in circumstances  indicate the carrying value of an asset may not be
recoverable. The provisions of Accounting  Standards Codification Topic 350, ‘‘Intangibles—Goodwill
and Other’’ require that we perform a two-step  impairment test on goodwill. In the first step, we
compare the fair value of each reporting unit to its carrying value.  Our reporting  units are consistent
with the reportable segments  identified in  Note 19  to  the Consolidated Financial Statements in Item 8.
We  determine the fair value of our reporting units based on  a weighting of income and market
approaches. Under the income approach, we  calculate the  fair value of a reporting unit based on the
present  value of estimated future cash  flows.  Under the  market approach, we estimate the fair  value
based on market multiples of revenue  or  earnings for  comparable companies. If the fair value of the
reporting unit exceeds the carrying value  of  the net assets assigned to that  unit, goodwill is not
impaired and we are not required to  perform further  testing. If the carrying value of the net assets
assigned to the reporting unit exceeds  the fair value  of the reporting  unit, then we must perform the
second  step of the impairment test in order to determine  the implied fair value of the reporting unit’s
goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then we
record an impairment loss equal to the  difference.  We  also compare the fair value of  purchased
intangible assets with indefinite lives to  their  carrying  value. We estimate  the  fair value of these
intangible assets using an income approach.  We  recognize an impairment  loss when the estimated fair
value of the intangible asset is less than  the carrying value.

Determining the fair value of a reporting unit or  an indefinite-lived purchased intangible asset is

judgmental in nature and involves the  use of  significant estimates and assumptions. These estimates
and assumptions include revenue growth  rates and operating margins used  to  calculate projected  future
cash flows, risk-adjusted discount rates,  assumed royalty rates, future economic and  market conditions
and determination of appropriate market  comparables.  We base our fair value estimates on
assumptions we believe to be reasonable  but  that are  unpredictable and inherently uncertain. Actual
future results may differ from those  estimates. In addition, we  make certain  judgments and assumptions
in allocating shared assets and liabilities  to determine the carrying values for  each of our reporting
units.

Our annual goodwill impairment analysis, which we performed during the fourth quarter of fiscal
2009, did not result in an impairment charge. The excess of fair value  over carrying value for each of
HP’s reporting units as of August 1, 2009, the annual testing  date, ranged from approximately
$750 million to approximately $35 billion.  In  order to evaluate the sensitivity of the fair value
calculations on the goodwill impairment  test, we applied a  hypothetical  10% decrease to the fair values
of each reporting unit. This hypothetical 10% decrease would result in  excess fair value over carrying
value ranging from approximately $550 million to approximately $31 billion  for each of  HP’s reporting
units.

Fair Value of Financial Instruments

We  measure certain financial assets and liabilities  at fair  value based on valuation techniques  using

the best information available, which may  include quoted  market prices, market comparables, and
discounted cash flow projections. Financial instruments are primarily comprised  of time deposits,
money market funds, commercial paper, corporate  and  other debt securities, equity securities and other
investments in common stock and common stock equivalents and derivative instruments.

44

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

We  measure fair value using the framework established by the FASB accounting  guidance for fair

value measurements and disclosures.  This  framework requires fair value to  be  determined based on the
exchange price that would be received for  an asset or paid to transfer  a liability (an  exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between
market participants.

The valuation techniques are based upon observable and unobservable  inputs.  Observable or

market inputs reflect market data obtained  from independent sources. Unobservable inputs require
management to make certain assumptions and judgments based on the best information available.
Observable inputs are the preferred source  of values. These two types of inputs create the following
fair value hierarchy:

Level 1—Quoted prices (unadjusted)  for  identical instruments in  active markets.

Level 2—Quoted prices for similar instruments  in active  markets, quoted prices  for identical or

similar instruments in markets that are  not active, and model-based valuation techniques for which all
significant assumptions are observable  in the  market  or can be corroborated by observable market data
for substantially the full term of the assets or  liabilities.

Level 3—Prices or valuations that require  management inputs that are both significant  to  the fair

value measurement and unobservable.

A description of the valuation methodologies we  use  to  measure our financial assets and liabilities

at fair value is provided below.

Cash Equivalents and Investments: We  hold time deposits, money  market funds,  commercial paper,

other debt securities primarily consisting  of corporate  and foreign government notes and bonds, and
common stock and equivalents. In general, and where  applicable, we  use quoted prices in  active
markets for identical assets to determine  fair value. If  quoted prices in active markets for identical
assets are not available to determine fair value, then we  use quoted prices for similar assets and
liabilities or inputs that are observable either directly or indirectly.  If quoted prices for identical  or
similar assets are not available, we use  internally developed valuation models, whose inputs include  bid
prices, and third party valuations utilizing underlying asset assumptions.

Derivative Instruments: As discussed  in Note  10 to the  Consolidated Financial Statements in
Item 8, we mainly hold non-speculative  forwards, swaps and options to hedge  certain foreign currency
and interest rate exposures. When active market quotes are not available, we  use industry standard
valuation models. Where applicable, these models project future cash flows and  discount the future
amounts to a present value using market-based observable inputs including  interest rate curves, credit
risk, foreign exchange rates, and forward and spot prices for currencies. In certain cases, market-based
observable inputs are not available and,  in  those  cases, we  use management judgment  to  develop
assumptions which are used to determine fair value.

Warranty Provision

We  provide for the estimated cost of  product  warranties at the time we recognize revenue. We

evaluate  our warranty obligations on a product  group  basis. Our standard product warranty terms
generally include post-sales support and repairs or replacement of a product at no additional charge for
a specified period of time. While we  engage in extensive product quality programs and processes,
including actively monitoring and evaluating  the quality  of our component suppliers, we base our
estimated warranty obligation upon warranty terms,  ongoing product failure rates, repair costs, product

45

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

call rates, average cost per call, and current  period product shipments. If  actual product  failure rates,
repair rates or any other post sales support  costs were  to  differ from our estimates, we would be
required to make revisions to the estimated warranty liability. Warranty terms  generally range from
90 days to three years parts and labor,  depending upon the product. Over the last three fiscal years, the
annual warranty provision has averaged  approximately 3.5% of annual net product  revenue, while
actual annual warranty costs have averaged  approximately  3.3% of annual net product revenue.

Retirement Benefits

Our pension and other post-retirement benefit costs and obligations  are dependent  on various
assumptions. Our major assumptions relate primarily  to  discount rates, salary growth,  long-term return
on plan assets and medical cost trend  rates. We base the  discount rate assumption on current
investment yields of high quality fixed income investments during the retirement benefits maturity
period. The salary growth assumptions  reflect our  long-term actual experience and future and
near-term outlook. Long-term return on plan assets is determined based  on historical portfolio results
and management’s expectation of the  future economic environment, as well as target asset  allocations.

In the beginning of fiscal 2008, we implemented a  liability-driven  investment strategy  for the  HP

U.S. defined benefit pension plan, which  was  frozen effective December 31, 2007. As part of the
strategy, we transitioned our investment allocation for  that plan to predominantly fixed income assets.
In fiscal  2008, we acquired EDS. The EDS U.S.  defined benefit plan assets were invested
predominantly in public equity and alternative investments. At the  end of fiscal 2009,  the assets of the
HP and EDS plans were merged, resulting in a portfolio with a blend of fixed income, equities and
alternatives. The expected return on  the plan assets, used in calculating the net benefit cost, is 7.99%
for fiscal 2010, which reflects the target asset  allocation of the  merged portfolio.

Our medical cost trend assumptions are developed based  on historical  cost data, the near-term

outlook and an assessment of likely long-term  trends. Actual results that differ from our  assumptions
are accumulated and are amortized generally over the  estimated  future working life of the  plan
participants.

Our major assumptions vary by plan  and  the weighted-average rates used are  set forth in Note 16

to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference. Each
assumption has different sensitivity characteristics, and, in general, changes, if any, have moved in the
same direction over the last several years. For fiscal  2009,  changes in the weighted-average rates for the
HP benefit plans would have had the following impact on  our net periodic benefit cost:

(cid:129) A decrease of 25 basis points in the long-term  rate of return  would have increased our net

benefit cost by approximately $43 million;

(cid:129) A decrease of 25 basis points in the discount rate would have increased our net benefit cost by

approximately $71 million; and

(cid:129) An increase of 25 basis points in the future compensation rate would have increased our net

benefit cost by approximately $15 million.

Loss  Contingencies

We  are involved in various lawsuits, claims,  investigations  and proceedings that arise in the
ordinary course of business. We record  a  provision  for a liability  when we believe that it is both
probable that a liability has been incurred and the amount can be reasonably estimated. Significant

46

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

judgment is required to determine both  probability  and  the estimated amount. We review these
provisions at least quarterly and adjust  these provisions to reflect the impact of negotiations,
settlements, rulings, advice of legal counsel,  and updated information.  Litigation is inherently
unpredictable and is subject to significant uncertainties, some of which  are beyond our control. Should
any of these estimates and assumptions change or prove to have been incorrect, it could have a
material impact on our results of operations,  financial position and cash  flows.

ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued a new accounting standard related to fair value

measurements. The new standard defines  fair value,  establishes a framework for measuring  fair value,
and expands disclosures about fair value  measurements. In February 2008,  the FASB issued a new
provision  which delayed the effective  date of the fair value measurements and disclosures for all
nonfinancial assets and nonfinancial  liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a  recurring  basis  (at least annually). In August 2009, the FASB
issued ASU No. 2009-05, ‘‘Measuring Liabilities at  Fair Value’’ in relation to the fair value
measurement of liabilities. We adopted  the applicable portions of the  provisions of the new standards
in the first and fourth quarters of fiscal  2009, and will adopt the provision  related to the nonfinancial
assets and nonfinancial liabilities in the first  quarter of fiscal 2010. Although  we will continue  to
evaluate  the application of the provision  for  the nonfinancial assets and  nonfinancial  liabilities, we do
not expect the adoption to have a material impact on our consolidated financial statements. See Note 9
to the Consolidated Financial Statements in Item 8 for  additional  information pertaining  to  fair value
measurements.

In December 2007, the FASB issued  a new  accounting standard  related to business combinations.

The new standard expands the definition  of  a business and a business combination; requires recognition
of assets acquired, liabilities assumed, and contingent consideration at their  fair value on the  acquisition
date  with subsequent changes recognized  in earnings; requires acquisition-related expenses  and
restructuring costs to be recognized separately from the business combination and expensed as
incurred; requires in-process research and development to be capitalized at fair value  as an indefinite-
lived intangible asset; and requires that  changes in accounting for  deferred tax asset valuation
allowances and acquired income tax uncertainties after the  measurement period be recognized  as a
component of provision for taxes. The  new  standard also establishes disclosure requirements to enable
the evaluation of the nature and financial effects of the business combination. In April 2009, the FASB
issued a new standard which clarified  the  accounting for pre-acquisition contingencies. We will adopt
these new business combination standards in the first quarter of fiscal 2010. The impact of  adoption
will be largely dependent on the size and nature of the  business combinations completed after the
adoption of this statement.

In December 2007, the FASB issued  a new  accounting standard  related to noncontrolling  interests.
The new standard establishes accounting and  reporting standards  for ownership interests in subsidiaries
held by parties other than the parent,  the  amount of consolidated net income attributable  to  the parent
and to the noncontrolling interest, changes in a parent’s ownership interest,  and the  valuation of
retained noncontrolling equity investments when  a subsidiary is deconsolidated. The new standard also
establishes disclosure requirements that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. We will adopt this new accounting standard in
the first quarter of fiscal 2010. We do not expect  the adoption of this standard will have a material
effect on our consolidated financial statements.

47

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

In May 2008, the FASB issued a new  accounting standard related  to  convertible debt instruments.

The new standard requires the issuer  of certain  convertible debt instruments that may be settled in cash
(or other assets) on conversion to separately account for the  liability  (debt) and equity (conversion
option) components of the instrument in a manner that reflects  the issuer’s non-convertible debt
borrowing rate. We will adopt this new accounting standard on  a retrospective basis in the first quarter
of fiscal 2010. We do not expect the adoption of this  standard will have a material effect on our
consolidated financial statements.

In June 2008, the FASB issued a new  accounting  standard that clarifies whether instruments
granted in share-based payment transactions should be included in computing earnings per share.
Under the new standard, we will be required  to  include restricted stock that contains non-forfeitable
rights to dividends in our calculation of basic earnings per share (‘‘EPS’’), and will need to calculate
basic EPS using the ‘‘two-class method.’’ The two-class method of computing EPS is an earnings
allocation formula that determines EPS  for each class  of  common stock and participating securities
according to dividends declared (or accumulated)  and participation  rights in  undistributed earnings. We
will adopt this new accounting standard  on  a retrospective basis in the first  quarter  of fiscal 2010. We
do not expect the  adoption of this standard will have a material effect on our calculation of basic EPS.

In November 2008, the FASB issued  a new  accounting standard related to defensive  intangible

assets. Defensive intangible assets are acquired intangible  assets that the acquirer does not intend to
actively use but intends to hold to prevent its competitors  from obtaining access  to  them. Under the
new standard, defensive intangible assets must be initially recognized at fair value and amortized  over
the benefit period. We will adopt this  new  accounting standard in the first quarter of fiscal 2010. The
impact of adoption will be largely dependent on the size and nature of business combinations
completed after the date of adoption.

In December 2008, the FASB issued  a new  accounting standard  that requires additional  disclosures
about assets held in an employer’s defined benefit pension or other postretirement plan. We will adopt
this  new  accounting standard in the first  quarter of fiscal 2010. We will present the required disclosures
in the prescribed format on a prospective  basis upon adoption. This new  standard will only affect the
notes to our consolidated financial statements.

In June 2009, the FASB issued a new  accounting  standard related to transfers of financial assets. It

amends previous guidance to remove  the concept of a  qualifying special-purpose entity and its
exemption from consolidation in the  transferor’s financial statements.  This new standard also
establishes conditions for reporting a transfer of a  portion of a financial asset  as a sale, modifies the
financial-asset derecognition criteria, revises how interests retained by the transferor in  a sale  of
financial assets are initially measured,  removes the guaranteed mortgage securitization
recharacterization provisions, and requires additional  disclosures. We will adopt this new accounting
standard in the first quarter of fiscal 2011.  We do  not expect the adoption of this standard will have  a
material effect on our consolidated financial statements.

In June 2009, the FASB issued a new  accounting  standard related to the consolidation of variable

interest entities. It eliminates the quantitative  approach previously required for determining the primary
beneficiary of a variable interest entity  and requires ongoing  qualitative reassessments of whether an
enterprise is the primary beneficiary of  a  variable  interest entity. This new standard also requires
additional disclosures about an enterprise’s involvement in variable interest  entities. We will adopt this
new accounting standard in the first quarter of fiscal 2011. We are currently  evaluating  the impact the
adoption of this standard will have on  our  consolidated financial statements.

48

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

During  the fourth quarter of fiscal 2009, we adopted the FASB  Accounting Standards Codification

and the Hierarchy of Generally Accepted Accounting Principles which only affected the specific
references to GAAP literature in the notes to our consolidated financial statements.

In October 2009, the FASB issued ASU 2009-13.  The new standard changes the requirements for

establishing separate units of accounting in  a multiple  element  arrangement and requires the allocation
of arrangement consideration to each deliverable  to  be  based on the  relative selling price. Concurrently
to issuing ASU 2009-13, the FASB also  issued ASU 2009-14. ASU 2009-14 excludes software that is
contained on a tangible product from  the scope of software revenue guidance if the software  is
essential to the tangible product’s functionality.

A further discussion of the financial impact of  ASU 2009-13 and ASU 2009-14 appears under

‘‘Critical Accounting Policies and Estimates’’ above.

RESULTS OF OPERATIONS

The following discussion compares the  historical results of operations on a GAAP basis for  the

fiscal years ended October 31, 2009,  2008,  and  2007. We have included  the results of  the business
operations acquired from EDS in our  consolidated  results  of operations beginning on August 26, 2008,
the closing date of the EDS acquisition.

Results of operations in dollars and as a  percentage of net revenue were  as follows for the

following fiscal years ended October  31:

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales(1)
. . . . . . . . . . . . . . . . . . . . . . .

$114,552
87,524

100.0% $118,364
100.0%
76.4% 89,699(2) 75.8% 78,683(2) 75.4%

100.0% $104,286

2009

2008

In millions

2007

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . .
Amortization of purchased intangible assets . .
In-process research and development charges .
Restructuring charges . . . . . . . . . . . . . . . . . .
Acquisition-related charges . . . . . . . . . . . . . .
Pension curtailments and pension settlements,
net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

27,028
2,819
11,613
1,571
7
640
242

24.2% 25,603
3.0% 3,611

24.6%
23.6% 28,665
2.5% 3,543
3.5%
10.1% 13,326(2) 11.3% 12,430(2) 11.9%
0.7%
0.9%
1.4%
0.2%
—
—
0.4%
0.2%
0.6%
—
—
0.2%

783
190
387
—

967
45
270
41

—

—

—

—

(517)

(0.5)%

Earnings from operations . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
Interest and other, net

10,136
(721)

8.8% 10,473
—
(0.6)%

Earnings before taxes . . . . . . . . . . . . . . . . . .
Provision for taxes . . . . . . . . . . . . . . . . . . . .

9,415
1,755

8.2% 10,473
1.5% 2,144

8.8% 8,719
458
—

8.8% 9,177
1.8% 1,913

Net earnings . . . . . . . . . . . . . . . . . . . . . . . . .

$

7,660

6.7% $

8,329

7.0% $

7,264

8.4%
0.4%

8.8%
1.8%

7.0%

(1) Cost of products, cost of services and  financing  interest.

(2) Certain pursuit-related costs previously reported  under Cost of sales have been realigned

retroactively to Selling, general and administrative expenses due to organizational  realignments.

49

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

Net Revenue

The components of the weighted net revenue change from the  prior-year period were as follows

for the following fiscal years ended October  31:

Personal Systems Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Imaging and Printing Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Enterprise Storage and Servers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
HP Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate Investments/Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
HP Financial Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2009

2008

Percentage  Points
5.6
(5.9)
1.0
(4.7)
0.7
(3.4)
0.6
(0.6)
(0.2)
(0.2)
0.4
—
5.4
11.6

Total HP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3.2)

13.5

Fiscal 2009

In fiscal  2009, the global slowdown of IT and  consumer spending impacted each of our segments.

Net revenue decreased 3.2% in fiscal 2009 from fiscal 2008  (increased 1.3%  on a  constant currency
basis). The unfavorable currency impact for fiscal  2009 was due primarily to the movement  of the
dollar against the euro. For fiscal 2009,  the Services segment contributed favorably  to  the total HP net
revenue change primarily as a result  of  the EDS acquisition. U.S.  net revenue increased 12% to
$41.3 billion for fiscal 2009 as compared  to  fiscal 2008, while net revenue from outside of the United
States decreased 10% to $73.2 billion.  The increase in  U.S.  net  revenue in fiscal 2009 from  fiscal  2008
was primarily a result of the acquisition of EDS.

The PSG net revenue decline in fiscal 2009  from fiscal 2008  was  primarily the  result of the  overall

slowdown in the global economy. PSG average selling prices (‘‘ASPs’’) declined  in both consumer
clients  and commercial clients. The ASP  decline in fiscal 2009 was offset  slightly by an increase  in the
option and monitor attach rates. PSG  unit volumes, however,  increased slightly in  fiscal 2009 as
compared to fiscal 2008.

IPG experienced net revenue declines in fiscal  2009 from fiscal  2008 in the commercial  and
consumer hardware business units and in the supplies business unit.  Unit volume declines across each
of the business units were a result of the  softness in both the  business and consumer  demand
environments.

ESS net revenue decreased in fiscal 2009  from fiscal 2008  driven by declines in  our  industry

standard servers (‘‘ISS’’), business critical systems and storage  business units. The revenue  declines were
due primarily to the economic slowdown and overall weak demand environment.  ISS unit volumes  and
average unit prices declined in fiscal  2009 as  compared to the prior  year.

HP Software experienced net revenue declines  in fiscal 2009 from fiscal 2008 in  both the business

technology optimization (‘‘BTO’’) business unit and the  other software business unit  due  primarily  to
revenue declines in licenses and services, the effect of which was partially offset  by  increased  support
revenue as a result of renewal rate increases.

50

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

Net revenue in Corporate Investments and Other declined in  fiscal 2009 from fiscal  2008, resulting

from lower sales of network infrastructure  products primarily as a result of the slowdown in the
networking market.

HPFS net revenue decreased in fiscal  2009 from fiscal 2008 due to unfavorable  currency

movements.

The net revenue increase in Services  in  fiscal  2009 from fiscal 2008 was due primarily to net
revenue increases in infrastructure technology outsourcing, application services and business process
outsourcing primarily as a result of the EDS acquisition in the fourth  quarter  of fiscal 2008, the effect
of which was partially offset by unfavorable  currency impacts and  a decline in spending from existing
customers. Net revenue in technology services  declined in  fiscal 2009 due primarily to unfavorable
currency impacts and weak economic conditions, the effect of  which was partially offset by growth in
extended warranty.

Fiscal 2008

In fiscal  2008, HP net revenue increased approximately  13.5% from the prior-year period (8.4% on

a constant currency basis). The favorable  currency impact for fiscal 2008 was due primarily  to  the
movement of the dollar against the euro. U.S. net revenue was  $36.9 billion for fiscal 2008,  an increase
of 6% from the prior year, while international net revenue increased 17% to $81.4 billion.

PSG net revenue increased in fiscal 2008 from fiscal  2007 as a result of a  unit volume  increase of

22%. The unit volume increase was the  result  of  strong  growth in notebooks with continued strength in
emerging markets. The positive revenue  impact from this  unit volume increase was moderated by
declines in ASPs in commercial and consumer clients  of  7% and 4%,  respectively.

IPG net revenue increased in fiscal 2008  from fiscal 2007 due to the growth in supplies net
revenue as a result of higher unit volumes with strong performance  from color-related  products. For
fiscal 2008, commercial hardware net revenues  increased slightly, while consumer hardware net
revenues declined  due primarily to competitive  pricing pressures and a slowing economy.

ESS net revenue increased in fiscal 2008 over  the prior-year period due primarily to strong
performance in storage, which was due  in  part to growth within our EVA and MSA product  lines, and
revenue growth in industry standard servers from increased unit volumes  and blade revenues. Fiscal
2008 revenues in business critical systems  were flat compared to the prior-year period.

HP Software net revenue growth in fiscal 2008 from fiscal 2007  was  attributable to strong  growth

in our BTO business unit resulting from  revenue increases in support,  growth in license revenue,
partially as a result of our acquisition of  Opsware Inc.  (‘‘Opsware’’) in September 2007,  and, to a  lesser
extent, increased services contract sales.

HPFS net revenue increased in fiscal  2008 from  the prior year due  primarily to an increase in the

mix of operating leases as a portion of  our asset portfolio and growth in average portfolio assets.

Services net revenue increased in fiscal  2008 over the prior year due primarily to net revenue
increases in technology services, infrastructure  technology outsourcing, application services and business
process outsourcing primarily as a result of the  EDS  acquisition on August 26,  2008.

51

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

Gross Margin

The gross margin table below identifies each segment’s weighted contribution  to  the change in the
total company gross margin from the  corresponding prior year. The segment contribution components
of the gross margin decline as compared  to  the prior-year periods were as follows:

Enterprise Storage and Servers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
HP Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
HP Financial Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate Investments/Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Imaging and Printing Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Personal Systems Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2009

2008

Percentage  Points
(0.1)
(0.8)
(0.2)
(0.1)
0.1
(0.1)
—
—
—
—
(0.1)
0.2
(0.1)
0.2

Total HP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(0.6)

(0.4)

Fiscal 2009

Total company gross margin decreased by 0.6 percentage points in fiscal 2009  as compared to fiscal

2008. From a segment perspective and  on a  weighted  basis, ESS had the  largest impact to the  total
company gross margin decline due to  mix and  rate declines.

ESS gross margin decreased in fiscal  2009 from the prior year  due primarily to competitive  pricing

across each of the segment business units and product mix shifts.

The gross margin in our Services segment increased for  fiscal  2009 from  fiscal  2008 due primarily
to the continued focus on cost structure  improvements, including  delivery efficiencies and  cost controls
in our technology services business, and EDS-related acquisition  synergies. This was partially offset  by
the mix effect from the acquisition of  the EDS  business, which has lower gross margins.

The increase in HP Software gross margin in fiscal  2009 from the prior  year  resulted primarily
from a favorable support and services  revenue mix  and  improved services margins, the effect of which
was partially offset by an unfavorable license revenue mix.

The HPFS gross margin decline in fiscal 2009  from fiscal 2008 was driven by unfavorable  currency

impacts, lower margins relating to end-of-lease activities,  higher bad debt expenses  and lower  margins
for remarketing and buyout activities, the  effect of  which was partially offset by higher portfolio
margins.

Gross margin in Corporate Investments  and  Other  declined for  fiscal 2009 from  fiscal 2008 as  a
result of a unit volume decline in the sale  of network infrastructure products  and competitive  pricing
pressures.

The improvement in IPG gross margin  in fiscal 2009  from the prior year resulted primarily from
an increase in the supplies mix and supplies  pricing,  the effect of which was partially offset by hardware
margin declines.

52

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

PSG had the most favorable impact to  the change in total company gross margin due to the mix

effect of its gross margin representing  a smaller component of  our total gross margin from  levels
experienced in the prior-year period.

PSG gross margin declined in fiscal 2009 from fiscal 2008, resulting from  ASPs declining  at a faster
pace than component costs combined with a mix  shift towards  lower-end products,  the effects of which
were partially offset by lower warranty  and supply chain costs and improvements in the option attach
rate.

Fiscal 2008

Total company gross margin decreased slightly in  fiscal  2008 from fiscal 2007. On a segment basis,
an increase in HP Software gross margin  and a  small  increase in ESS gross  margin were offset by small
gross  margin declines in Services and HPFS and flat gross margin growth across our remaining
segments.

The slight improvement in ESS gross margin in  fiscal 2008 from the prior year  was primarily  a

result of improved cost management  and attach rates in industry standard servers.

Services gross margin declined in fiscal 2008 from the  prior year  due primarily to the  impact  from
the continued competitive pricing environment, partially  offset by  the continued focus on  cost structure
improvements generated by delivery efficiencies  and cost controls.

For fiscal 2008 as compared to fiscal 2007, the improvement  in HP  Software gross margin was

primarily the result of cost savings in  the BTO business  unit.

HPFS gross margin declined slightly  in fiscal 2008 due primarily to higher bad debt expenses, the

effect of which was partially offset by increased  margins  on end-of-lease activity.

IPG gross margin remained flat in fiscal 2008  as  compared to fiscal 2007  with improved supplies

margins resulting from mix shifts being  offset by  unfavorable hardware margins.

In fiscal  2008, PSG gross margin remained flat due  primarily to declining ASPs offset by an

increase in the attach rate of higher-margin options.

Operating Expenses

Research and Development

Total research and development (‘‘R&D’’) expense  decreased  in fiscal 2009  as compared to fiscal

2008 due primarily to favorable currency impacts related to the  movement of the dollar against the
euro, as well as effective cost controls,  the  effect of  which  was partially offset by additional expenses
related primarily to Services. In fiscal  2009, R&D expense  as a percentage of net revenue decreased  for
ESS, PSG, and IPG, and increased for  HP Software, Services  and Corporate Investments.

Total R&D decreased in fiscal 2008 as compared to fiscal 2007, due primarily  to  effective cost
controls, the impact of which was partially offset by  the unfavorable currency  impacts related to the
movement of the dollar against the euro. Each  of our major segments experienced a year-over-year
decrease in R&D expense as a percentage  of  net revenue  in  fiscal 2008.

53

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

Selling, General and Administrative

Selling, general and administrative (‘‘SG&A’’) expense decreased in fiscal 2009 from fiscal  2008
due primarily to favorable currency impacts related  to  the movement of the dollar against the  euro,
lower compensation expense as well as effective  cost management, the impact of  which was partially
offset by additional expenses  related  to  the EDS acquisition.  In fiscal 2009, SG&A expense  as a
percentage of net revenue decreased for  each of our  segments, except  for Corporate Investments.

Total SG&A expense increased in fiscal  2008 due primarily to higher field  selling costs as a  result

of our investments in sales resources,  unfavorable  currency impacts related to the movement  of the
dollar against the euro, and additional expenses related to the EDS acquisition. Each of our major
segments experienced a year-over-year  decrease in SG&A expense as a  percentage of net  revenue
during fiscal 2008.

Amortization of Purchased Intangible Assets

The increase in amortization expense  in fiscal 2009 from fiscal 2008  was  due  primarily to

amortization expenses related to the  intangible assets  purchased as part of the EDS acquisition.

The increase in amortization expense  during fiscal 2008 as compared to fiscal 2007  was due
primarily to amortization expenses related  to the intangible assets purchased  as part of the EDS
acquisition as well as other acquisitions  made in fiscal 2008.

For more information on our amortization of  purchased intangibles assets, see Note 7 to the

Consolidated Financial Statements in  Item 8, which  is incorporated herein by reference.

In-Process Research and Development Charges

We  record IPR&D charges in connection  with acquisitions accounted for as business combinations

as more fully described in Note 6 to  the  Consolidated  Financial Statements in Item 8. In fiscal 2009,
fiscal 2008 and fiscal 2007, we recorded IPR&D charges of $7 million, $45 million and $190 million,
respectively, related to acquisitions. The  decrease  in IPR&D in fiscal 2009 from fiscal 2008  was due
primarily to higher IPR&D expenses in  the prior  year as a  result of our EDS acquisition in  the fourth
quarter of fiscal 2008.

Restructuring

Restructuring charges for fiscal 2009 were $640 million. These charges included $346 million of
severance and facility costs related to  our  fiscal  2008  restructuring plan,  $297 million of severance costs
associated with our fiscal 2009 restructuring plan, and a  reduction of $3  million related to adjustments
to other restructuring plans.

Restructuring charges for fiscal 2008 were $270 million, which included $246 million of charges due

primarily to severance and facility costs  related to the  EDS  acquisition and a net charge of  $24 million
relating to adjustments for existing restructuring programs.

Restructuring charges for fiscal 2007 were $387 million, which included $354 million of expenses

related to severance and other benefit costs associated with  those employees  who elected to participate
in the early retirement program implemented in fiscal 2007 and a net  charge of $33 million relating to
adjustments to our previous restructuring  programs.

54

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

For more information on our restructuring charges, see Note 8 to the  Consolidated Financial

Statements in Item 8, which is incorporated  herein by reference.

Workforce Rebalancing

As part of our ongoing business operations, we  incurred workforce rebalancing charges for
severance and related costs within certain business segments in  fiscal 2009. Workforce  rebalancing
activities are considered part of normal operations as we continue to optimize  our cost structure.
Workforce rebalancing costs are included  in  our business segment results, and  we expect to incur
additional workforce rebalancing costs  in  the future.

Acquisition-related Charges

We  recorded acquisition-related charges of $242 million and $41 million in fiscal 2009 and fiscal

2008, respectively, related primarily to consulting  and  integration  costs as well as retention bonuses
associated with the EDS acquisition.  The  increase in the acquisition-related charges in fiscal 2009 was
due primarily to our acquisition of EDS in  August  2008.

Pension Curtailments and Pension Settlements, Net

In fiscal  2007, we recognized a net gain on pension curtailments and settlements of $517 million,

relating primarily to a $542 million curtailment gain associated with a modification to our U.S.  defined
benefit pension plan and post-retirement  benefit  plan. This  curtailment gain was offset partially by net
settlement losses related to our other pension plan design changes.

For more information on our retirement and  post-retirement benefit plans, see Note 16 to the

Consolidated Financial Statements in  Item 8, which  is incorporated herein by reference.

Interest and Other, Net

Interest and other, net decreased by $721 million in fiscal 2009 as compared to fiscal 2008.  The

decrease was  driven primarily by higher interest expenses due to higher average  debt balances
principally related to the EDS acquisition, lower  interest income  as a result  of lower interest rates, and
higher  currency losses on balance sheet remeasurement items.  Additionally, there were higher gains
from the sale of real estate in fiscal 2008  as compared to fiscal  2009.

Interest and other, net decreased by $458 million in fiscal 2008 as compared to fiscal 2007.  The

decrease resulted primarily from currency losses on balance  sheet remeasurement items and lower
interest income as a result of lower interest rates, the effect of which was partially offset by lower
interest expense. Additionally, the prior-year period  benefited  from higher gains from the sale of real
estate.

Provision for Taxes

Our effective tax rates were 18.6%, 20.5% and 20.8% in fiscal 2009, fiscal 2008 and fiscal 2007,
respectively. HP’s effective tax rate generally differs from the U.S. federal statutory rate of 35% due to
favorable tax rates associated with some  earnings from  HP’s operations in lower-tax  jurisdictions
throughout the world. HP has not provided U.S.  taxes  for all of such earnings because HP plans to
reinvest some of those earnings indefinitely  outside the United States.

55

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

The decrease in the overall tax rate in fiscal 2009 from fiscal 2008  was  due primarily to the  net

income tax benefits recorded for fiscal 2009  which were  related to foreign net  operating losses,
adjustments to estimated fiscal 2008 tax  accruals upon  filing the 2008 income tax returns, valuation
allowance reversals for state and foreign net  operating  losses,  and other  miscellaneous items.

The decrease in the overall tax rate in fiscal 2008 from fiscal 2007  was  related in  part to lower tax

rates in other jurisdictions.

For a  full reconciliation of our effective tax rate to the U.S. federal  statutory rate of 35% and
further explanation of our provision  for  taxes, see Note 14 to the Consolidated Financial Statements in
Item 8, which is incorporated herein  by reference.

Segment Information

A description of the products and services,  as well  as financial data, for each segment  can be
found in Note 19 to the Consolidated  Financial Statements in Item  8, which is incorporated herein by
reference. We have realigned segment  financial  data for the fiscal years ended October 31, 2008 and
2007 to reflect changes in HP’s organizational structure  that occurred  at the  beginning  of the first
quarter of fiscal 2009. We describe these  changes more fully in  Note 19.  We have presented the
business segments in this Annual Report  on  Form 10-K based  on the distinct nature of various
businesses such as customer base, homogeneity of products and technology. The discussions below
include the results of each of our segments.

HP Enterprise Business

Services, ESS and HP Software are reported collectively as a broader HP Enterprise Business. We

describe the results of the business segments of the HP Enterprise Business  in more detail below.

Services

As a result of the acquisition of EDS, we  renamed our services  segment and  reorganized the
business units within that segment to  better  align  them to our enhanced services portfolio. The business
reorganization resulted in three new  business units: application services, infrastructure technology
outsourcing and business process outsourcing.  As part of this reorganization, the businesses  included in
the former HP consulting and integration  business unit were divided among the application services
and technology services business units and the  HP  Software segment. In addition, the businesses
included in the former outsourcing services business  unit  were divided among the infrastructure
technology outsourcing and business process outsourcing business units. Further, the managed print
services offering under technology services  was  moved  to  IPG.

56

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

Historical Results

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from operations as a % of net  revenue . . . . . . . . . . . .

2009

For fiscal years ended October 31
2008(1)
In millions
$20,977
$ 2,518

2007(1)
In millions
$15,329
$ 1,782

In millions
$34,693
$ 5,044

14.5%

12.0%

11.6%

(1) Reflects certain reclassifications made to historical results to conform  to  the current  year
presentation as noted in Note 1 to the Consolidated Financial Statements in Item 8.

The components of the weighted net revenue  growth as compared to the prior-year periods by

business unit  were as follows for the following fiscal years ended October  31:

Infrastructure technology outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Application services
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business process outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technology services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2009

2008

Percentage Points
18.7
39.9
8.5
17.3
4.0
10.6
5.6
(2.4)

Total Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

65.4%

36.8%

Services net revenue increased 65.4%  (71.6% when  adjusted for currency) for fiscal 2009,  as
compared to fiscal 2008. The increase in  revenues is due primarily to the acquisition of EDS on
August 26, 2008. Services net revenue  for  fiscal 2009 includes revenue from  infrastructure technology
outsourcing, technology services, application  services  and  business process  outsourcing, which  accounted
for approximately 46%, 28%, 17% and 9% of revenues, respectively. Net  revenue in  infrastructure
technology outsourcing, application services  and business process outsourcing increased due to the EDS
acquisition. The net revenue increase  in  infrastructure technology outsourcing,  application  services,  and
business process outsourcing was partially  offset by unfavorable currency impacts and a decline  in
spending from existing customers not  being offset  with new growth due to slowing demand in the
current economic environment. Application services  and business  process outsourcing were impacted to
a greater degree than infrastructure technology  outsourcing.  Net revenue in technology  services
declined due  primarily to unfavorable currency impacts and weak economic conditions, the  effect  of
which  was partially offset by growth in extended  warranty.

Services earnings from operations as a percentage of net revenue  increased  by  2.5 percentage
points for fiscal 2009, as compared to  fiscal 2008.  The  operating margin increased due primarily to a
decrease in operating expenses as a percentage of revenue. There  was  also an increase  in gross  margin
for fiscal 2009. Operating expense declined as a  result of a continued focus on cost structure
improvements from overall cost controls.  The gross margin  in our  Services segment increased  for fiscal
2009 from fiscal 2008 due primarily to  the continued focus on cost structure improvements,  including
delivery efficiencies and cost controls in our technology  services  business, and EDS-related acquisition
synergies. This was partially offset by  the  mix  effect  from the acquisition of the EDS business, which
has lower gross margins.

57

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

Services net revenue (including EDS  results from  August 26, 2008) increased 36.8% (30.0% when

adjusted for currency) for fiscal 2008, as  compared  to  fiscal  2007. Net revenue increased from the prior
year primarily due to the acquisition  of EDS. Services  net revenue  (excluding  EDS results from
August 26, 2008) increased 11.7% (4.8%  when adjusted for  currency) for fiscal 2008,  as compared to
fiscal 2007. Services net revenue (including  EDS results from August 26, 2008) for fiscal 2008 includes
revenue from technology services, infrastructure technology outsourcing, application services  and
business process outsourcing, which accounted for  approximately  49%, 36%, 12% and 3% of revenues,
respectively. Net revenue in technology services increased in fiscal 2008 from  the prior year due
primarily to growth in IT solution support services,  extended warranty revenue and favorable  currency
impacts, the impact of which was partially offset by competitive pricing  pressures. Net revenue in
infrastructure technology outsourcing, application services and business process outsourcing increased
driven mainly by the EDS acquisition,  an  increase in volume,  favorable  currency impacts and new
business.

Services earnings from operations as a  percentage of net revenue (including EDS results from

August 26, 2008) increased by 0.4 percentage  points for fiscal 2008, as compared  to  fiscal 2007. The
operating margin increase was the result  of  a decrease in operating expenses as a percentage of net
revenue, partially offset by a slight decrease in gross margin.  The gross margin decrease in fiscal 2008
was due primarily to the impact of the continued competitive  pricing environment, which was partially
offset by the continued focus on cost  structure improvements generated by delivery efficiencies and cost
controls. In fiscal 2008, continued efficiency improvements  in our operating expense structure
contributed to the decline in operating  expenses as  a percentage of net revenue compared to the prior
year.

Combined Segment Results

The combined segment results below refer to the results of our  services business for fiscal 2008,
which  include the results of EDS from  the acquisition date, combined with the EDS results for the nine
months ended June 30, 2008 and the  period from August 1, 2008 to the acquisition date. The combined
segment results are presented for informational purposes only and are not indicative of the results of
operations that would have been achieved  had the  businesses been  operated together during that
period.

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from operations as a % of net  revenue . . . . . . . . . . . . . . .

For the fiscal year ended October 31

Combined
Segment
Results
2008(1)
In millions
$39,194
$ 3,216

%
(Decrease)
Increase

(11.5)%
56.9%

2009

In millions
$34,693
$ 5,044

14.5%

8.2%

(1) Refers to the results of Services for the year ended October 31, 2008  combined with the EDS

results for the nine months ended June 30, 2008 and for the period from August 1, 2008 to the
acquisition date. In order to conform  the presentation  to  our segment earnings from operations,
we excluded certain EDS expenses that we do not allocate to our  segments.

58

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

Services net revenue decreased 11.5% (3.8% when adjusted for currency) for fiscal 2009,  as
compared to the fiscal 2008 combined  segment results presented in the table above. Services net
revenue for the prior period combined  segment results  includes revenue from infrastructure technology
outsourcing, technology services, application services  and  business process  outsourcing, which accounted
for approximately 46%, 26%, 19% and 9% of revenues, respectively. The net  revenue declines were
due primarily to an unfavorable currency  impact,  deferred revenue write-down resulting from purchase
accounting, and lower add-on business  due to the slowing economic  environment. Further, Services  net
revenue for fiscal 2009 as compared  to  the combined segment results for fiscal 2008  reflects a weighted
net revenue decline in the infrastructure technology  outsourcing, business process outsourcing,
technology services and application services  units of 5.0%, 3.9%, 1.3% and  1.3%, respectively.

Services earnings from operations as a  percentage of net segment revenue increased 6.3 percentage

points for fiscal 2009, as compared to  the fiscal  2008 combined segment results. Operating margin
increased as a result of an increase in  gross margin and a  decrease  in operating expenses as a
percentage of net revenue. Gross margin  increased due primarily to the  continued  focus on cost
structure improvements, including delivery efficiencies and cost controls, and acquisition synergies. The
continued improvements in our operating expense  structure contributed to the decline in  operating
expenses as a percentage of net revenue compared to fiscal 2008.

Enterprise Storage and Servers

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from operations as a % of net  revenue . . . . . . . . . . . . . . . .

For the fiscal years ended October 31

2009

2008

2007

$15,359
$ 1,518

In millions
$19,400
$ 2,577

$18,639
$ 2,148

9.9%

13.3%

11.5%

The components of the weighted net revenue  change as compared to prior-year periods by

business unit were as follows for the following fiscal years ended October  31:

Industry standard servers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business critical systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2009

2008

Percentage  Points
1.5
(12.1)
(0.1)
(4.9)
2.7
(3.8)

Total ESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(20.8)

4.1

ESS net revenue decreased 20.8% (16.0% when  adjusted for currency) in fiscal  2009 from fiscal

2008. The revenue decline was due primarily to the economic  slowdown and  overall weak  demand
environment. ISS net revenue declined  20% in fiscal 2009 as  compared to fiscal 2008 due to declines  in
unit volume. ISS average unit prices  declined in  fiscal 2009 while improving  in the second half of fiscal
2009 as a result of a new product ramp up. Total  ESS blades revenue declined  by  8% in fiscal  2009 as
compared to fiscal 2008. Business critical systems  net revenue  decreased 27% in fiscal 2009  compared
to fiscal 2008 driven by a decline in Integrity server revenue due  to  weaker market conditions and by
the planned phase-out of the PA-RISC  and Alpha Server product lines. Storage  net revenue  declined
17% in fiscal 2009 compared to fiscal 2008 due to a decline in  disk and tape  products as a result  of  a

59

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

weaker demand environment, the effects  of  which were  partially offset by revenue resulting from the
acquisition of Lefthand Networks, which  was completed in the first quarter  of fiscal 2009.

In fiscal  2009, ESS earnings from operations as a percentage of net revenue decreased by

3.4 percentage points compared to fiscal  2008, due primarily to a decline  in gross margin. Gross margin
in fiscal 2009 decreased due primarily to competitive pricing across each of the  segment business units
and product mix shifts. Operating expense as  a percentage  of net revenue in fiscal 2009 was generally
consistent with the fiscal 2008.

ESS net revenue increased 4.1% (decreased 0.5% when adjusted  for currency) in fiscal 2008 from

fiscal 2007. Storage net revenue increased 13% in fiscal 2008 compared to fiscal 2007, with strong
performance in mid-range EVA, entry MSA, tape  media and storage software. Industry standard servers
net revenue grew 2% in fiscal 2008 compared  to  fiscal 2007 as a result of growth in blade revenue and
unit volumes. Revenue growth in the  industry standard servers  business was partially offset by the
decline  in average unit prices driven  by market movement to low-end  product lines and component cost
declines. Business  critical systems net  revenue growth was flat in fiscal 2008  compared to fiscal 2007.
Integrity servers net revenue grew 22%  in fiscal 2008  and  represents 79% of the business critical
systems revenue mix, up from 64% in fiscal 2007. The increase was offset by revenue declines in the
PA-RISC product line and the planned  phase-out of our  Alpha Server product line. Integrity servers
revenue in fiscal 2008 also included revenue  from Montvale-based Integrity servers.

In fiscal  2008, ESS earnings from operations as a percentage of net revenue increased by

1.8 percentage points compared to fiscal  2007, due primarily to a decrease in operating expenses  as a
percentage of net revenue. Gross margin  increased slightly in fiscal 2008 compared to fiscal 2007  due
primarily to cost management and improved attach rates in industry standard servers, the effect of
which  was mostly offset by competitive  pricing  in  storage  and industry  standard servers and a mix shift
to entry level integrity servers. The decrease  in operating  expense as a percentage of net revenue in
fiscal 2008 was due primarily to continued cost structure improvements.

HP Software

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from operations
Earnings from operations as a % of net  revenue . . . . . . . . . . . .

For the fiscal years ended October 31

2009

2008

2007

$3,572
$ 684

In millions
$4,220
$ 499

$3,628
$ 248

19.1%

11.8%

6.8%

The components of the weighted net revenue  change as compared to the prior-year  periods  by

business unit were as follows for the following fiscal years ended October  31:

Business technology optimization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2009

2008

Percentage  Points
14.2
(9.7)
2.1
(5.7)

Total HP Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(15.4)

16.3

HP Software net revenue decreased  15.4%  (10.8%  when adjusted for  currency) in fiscal  2009 from
fiscal 2008, due to softening in enterprise spending and declines in large  deals. For fiscal 2009, revenue

60

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

from licenses and services declined, the effect of which was partially  offset by increased support
revenue as a result of renewal rate increases. Net revenue from BTO decreased  15% in fiscal 2009 as
compared to fiscal 2008. Net revenue  from other software decreased 17% in fiscal 2009 as compared to
fiscal 2008, due to declines in revenues  for communication and media solutions, business intelligence
solutions and information management.

HP Software earnings from operations as  a percentage of net revenue increased by 7.3 percentage
points in fiscal 2009 as compared to  fiscal  2008. The operating margin improvement  in fiscal 2009 was
due primarily to increased gross margin coupled  with decreased operating expenses as a  percentage of
net revenue. The increase in gross margin  in fiscal 2009 resulted primarily from a favorable support
and services revenue mix and improved  services margins, the effect of which was partially offset by an
unfavorable license revenue mix. The  decrease in operating expenses  as a percentage of net revenue in
fiscal 2009 was due primarily to continued cost controls.

HP Software net revenue increased 16.3% (10.4% when adjusted for  currency) in fiscal  2008 from
fiscal 2007. Net revenue from BTO increased 23% in fiscal 2008  as compared to fiscal 2007. BTO net
revenue growth in fiscal 2008 was driven  by increases in support, higher license revenue  due  in part to
the Opsware acquisition, and increases in services contracts. Net revenue from other software increased
by 6% in fiscal 2008 as compared to  fiscal  2007. The growth in other software net revenue in fiscal
2008 was attributable primarily to the  growth in the information  management business due in part to
our  acquisition of  Tower Software in May  2008 and increases in services from business intelligence
solutions, the effect of which was partially  offset by a net  revenue decline in communication and media
solutions resulting from a competitive  environment following network equipment provider industry
consolidation and the transfer of some hardware  revenues  to  ESS due to  a platform shift.

HP Software earnings from operations as  a percentage of net revenue increased by 5.0 percentage

points in fiscal 2008 as compared to  fiscal  2007. The operating margin increase in fiscal 2008 was the
result of a combination of an increase in  gross margin and a decrease  in operating expenses as  a
percentage of net revenue. The increase  in  gross  margin in fiscal 2008  was  due  primarily to cost savings
in the BTO business, cost structure improvements as  a result of increased scale in the information
management business and, to a lesser  extent,  a favorable change in the  revenue mix driven by higher
revenues from the BTO business, which  typically  has  higher gross  margins than the remainder  of the
segment. The decrease in operating expenses as a  percentage of net revenue in fiscal 2008  was due
primarily to continued cost controls, the  effect of which was partially offset  by  increased field selling
costs driven by sales force investments.

Personal Systems Group

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from operations as a % of net  revenue . . . . . . . . . . . . . . . .

For the fiscal years ended October 31

2009

2008

2007

$35,305
$ 1,661

In millions
$42,295
$ 2,375

$36,409
$ 1,939

4.7%

5.6%

5.3%

61

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

The components of the weighted net revenue change as compared to prior-year periods by

business unit  were as follows for the following fiscal years ended October 31:

Desktop PCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notebook PCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Workstations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Handhelds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2009

2008

Percentage  Points
2.1
(8.9)
13.8
(5.8)
0.4
(1.5)
(0.5)
(0.4)
0.4
0.1

Total PSG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(16.5)

16.2

PSG net revenue decreased 16.5% (11.6% when  adjusted for currency) in fiscal 2009 from  fiscal

2008. The revenue decline was primarily  the result of  the overall  slowdown in  the global economy.
Despite the overall regional declines,  revenue in China increased for fiscal 2009 as compared to fiscal
2008. PSG net revenue decreased across all  businesses in  fiscal 2009. Unit volume increased slightly in
fiscal 2009 as compared to fiscal 2008,  as an increase in  notebook PC volume was offset by a decline in
desktop PCs, workstations, and handheld  devices. The unit volume  increase in  notebook PCs was due
in part to growth of the HP and Compaq  mini notebooks.  In  fiscal 2009,  net revenue for  notebook PCs
decreased 11%, while net revenue for  desktop PCs  decreased 23% from fiscal  2008. Workstations and
handheld revenues declined 33% and 52%, respectively, in fiscal 2009 from fiscal 2008.  In fiscal  2009,
net revenue for consumer clients decreased 14%, while  net revenue for commercial clients decreased
19% from fiscal 2008. The net revenue  increase in Other  PSG was related  primarily to increased sales
of extended warranties, support services and third-party  branded  options. In fiscal  2009, PSG  net
revenue was also impacted by ASP declines.  ASPs in consumer clients declined 21%,  while ASPs in
commercial clients declined 16%. ASPs  declined  from fiscal 2008 due primarily to a competitive pricing
environment, component cost reductions  and the impact of currency combined  with a mix shift  toward
lower-end models. The ASP decline in fiscal 2009  was  offset  slightly  by an increase  in the option and
monitor attach rates.

PSG earnings from operations as a percentage of net revenue  decreased by  0.9 percentage  points

in fiscal 2009 from fiscal 2008. The decrease  was  due  primarily to a  gross margin decline resulting from
ASPs declining at a faster pace than component costs combined with a  mix shift  toward lower-end
products, the effects of which were partially offset  by  lower  warranty and supply chain costs  and
improvements in the option attach rate.  The  decrease in operating  expenses as  a percentage  of  net
revenue in fiscal 2009 was the result  of effective cost  controls.

PSG net revenue increased 16.2% (10.8% when  adjusted for currency) in fiscal 2008 from  fiscal

2007. Unit volumes increased by 22%  in fiscal 2008 as compared to fiscal 2007. The unit volume
increase was the result of strong growth  in notebooks, with continued  strength  in emerging  markets.  In
fiscal 2008, net revenue for notebook  PCs  increased 28% while net  revenue for desktop PCs increased
5% from fiscal 2007. In fiscal 2008, net revenue for consumer clients increased 19%,  while net revenue
for commercial clients increased 15%  from fiscal  2007. The  net revenue  increase in Other PSG in fiscal
2008 was related primarily to increased  sales of third-party branded  options and extended  warranties.
The revenue increase was partially offset  by a decline  in handhelds revenue driven by product transition
within converged devices. In fiscal 2008,  the positive revenue impact  from the PSG unit volume
increase compared to fiscal 2007 was  also  moderated by a 7% decline in  commercial client ASPs and a

62

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

4% decline in consumer client ASPs.  ASPs declined from fiscal 2007 as a result of price erosion related
to component cost reductions and a competitive pricing  environment, the effect of which was partially
offset by an increased notebook mix and improved attach  rates for monitors and other options.

PSG earnings from operations as a percentage of net revenue increased  by  0.3 percentage  points in

fiscal 2008 from fiscal 2007 as a result  of a decrease in operating expenses as a percentage of net
revenue combined with a flat gross margin. Gross margin performance  was a result  of declining ASPs
offset by an increase in the attach rate  of  higher-margin  options.  The  operating expense  decline as a
percentage of net revenue in fiscal 2008  was the result primarily of the increased net revenue  and
continued efforts to improve our cost structure through efficiency measures.

Imaging and Printing Group

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from operations as a % of net  revenue . . . . . . . . . . . . . . .

For the fiscal years ended October 31

2009

2008

2007

$24,011
$ 4,310

In millions
$29,614
$ 4,559

$28,609
$ 4,293

18.0%

15.4%

15.0%

The components of the weighted net revenue  change as compared to the prior-year  periods  by

business unit were as follows for the following fiscal years ended October  31:

Commercial hardware . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer hardware . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2009

2008

Percentage  Points
0.2
5.1
(1.8)

(8.9)
(6.6)
(3.4)

Total IPG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(18.9)

3.5

IPG net revenue decreased 18.9% (16.5% when  adjusted for currency) in fiscal 2009 from  fiscal
2008, reflecting the impact of the global economic  slowdown. Net revenue for commercial hardware
declined 36% in fiscal 2009 as compared to fiscal 2008. The net revenue decline in  commercial
hardware was driven by a unit volume decline  of  38% in fiscal 2009 from fiscal 2008, due primarily to
worldwide market weaknesses impacting  both our  laser and our graphics businesses. Supplies net
revenue declined 11% in fiscal 2009 as  compared to fiscal 2008. The  supplies net revenue decline in
fiscal 2009 was across all platforms and was  the result of  reductions in channel inventory and
unfavorable currency impacts, the effect  of which was partially moderated by supplies pricing. Net
revenue for consumer hardware declined 27% in  fiscal  2009 as compared to fiscal  2008. The net
revenue decline in consumer hardware  was driven by  a unit volume  decline  of 24% in  fiscal  2009 from
fiscal 2008, reflecting the weak demand environment and channel inventory reductions.

IPG earnings from operations as a percentage of net  revenue increased  2.6 percentage  points in
fiscal 2009 as compared to fiscal 2008.  Operating margin improvement in fiscal  2009 was a combination
of an increase in gross margin and a  decrease in operating expenses as a percentage of  net revenue.
The improvement in gross margin in fiscal 2009 resulted primarily from an increase in  the supplies mix
and supplies pricing, the effect of which  was  partially  offset  by hardware margin  declines due to

63

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

unfavorable currency impacts and declines in average revenue  per  unit. The decrease in operating
expenses as a percentage of net revenue in  fiscal 2009  was due primarily to effective cost controls.

IPG net revenue increased 3.5% (decreased  0.8% when adjusted for currency) in fiscal 2008 from
fiscal 2007. The growth in printer supplies  net revenue in fiscal 2008 from fiscal 2007 reflected  higher
unit volumes of supplies as a result of  the  strong performance  of color-related  products. The slight
increase in commercial hardware net  revenue in fiscal 2008 from fiscal 2007 was due mainly to unit
volume growth in multifunction printers, color laser  printers and large format printing products and
revenue from recent acquisitions, partially  offset  by continued competitive pricing pressures. The
decrease in consumer hardware net revenue in fiscal 2008 from fiscal 2007 was due primarily to
discontinued sales of cameras, competitive pricing  pressures  and  lower unit volumes of consumer
hardware as a result of slower growth in  the overall  consumer  printer market. Both consumer  and
commercial hardware were impacted by the continued  shift  in demand to lower-priced products and a
slowing economy, which caused average revenue per unit in each category to decline.

IPG earnings from operations as a percentage of net revenue increased by 0.4 percentage points in

fiscal 2008 from the prior fiscal year. The operating margin  improvement in  fiscal 2008 was due to
lower operating expenses as a percentage of net revenue. In fiscal 2008, the  gross margin remained flat
driven by improved margins for supplies  as a result of product mix, the effect of which was offset by
unfavorable hardware margins. The decrease in operating expenses as a percentage of net  revenue in
fiscal 2008 was due primarily to higher  revenue  and continued  cost controls, the effect  of which was
partially offset by increased investments in our  enterprise printing sales force.

HP Financial Services

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from operations as a % of net  revenue . . . . . . . . . . . . .

For the fiscal years ended October 31

2009

2008

2007

$2,673
$ 206

In millions
$2,698
$ 192

$2,336
$ 155

7.7%

7.1%

6.6%

HPFS net revenue decreased by 0.9%  in fiscal 2009  from fiscal 2008.  The  net revenue decrease

was due to unfavorable currency movements.  On a  constant currency  basis, fiscal 2009  net revenue
increased due primarily to portfolio growth, increased operating  lease mix and  higher buyout activities,
the effect of which was partially offset  by lower levels of remarketing and end-of-lease  activity.

HPFS earnings from operations as a percentage of net revenue increased by 0.6 percentage points

in fiscal 2009 from fiscal 2008 due primarily to a decrease in operating expenses, the effect of which
was partially offset by a decline in gross  margin. The operating expense  decrease  was due to continued
cost controls. The decline in gross margin  was driven by  an unfavorable currency  impact,  lower margins
relating to end of lease activity, higher  bad debt expenses,  and  lower  remarketing and  buyout  margins,
the effect of which was partially offset  by higher portfolio margins.

HPFS net revenue increased by 15.5%  in fiscal 2008 from fiscal 2007. The  net revenue  increase
was due primarily  to a shift towards operating leases from  financing leases in  the overall portfolio asset
mix, higher average portfolio assets during the  year,  higher end-of-lease  activity and a favorable
currency impact.

64

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

HPFS earnings from operations as a percentage of net revenue increased by 0.5 percentage points
in fiscal 2008 from fiscal 2007 due primarily to a decrease in operating expenses as a percentage of net
revenue and increased margin on end-of  lease activity,  the effect of which was offset by higher bad debt
expenses and lower portfolio margins  due  to  higher operating leases in the portfolio asset  mix.  The
operating expense decrease as a percentage of revenue is driven by  a higher rate of increase in
revenues relative to operating expenses due to higher operating lease mix of the portfolio and
continued cost controls.

Financing Originations

For the fiscal years ended October 31

2009

2008

2007

Total financing originations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$5,210

In millions
$4,872

$4,441

New financing originations, which represent the  amounts  of financing provided to customers for
equipment and related software and services  and  include  intercompany activity, increased 6.9% in  fiscal
2009 from fiscal 2008 and 9.7% in fiscal 2008 from fiscal  2007.  The increases  reflect higher financing
associated with HP product sales and services offerings resulting from improved integration and
engagement with HP’s sales efforts offset  by unfavorable currency impact.

Portfolio Assets and Ratios

HPFS maintains a strategy to generate  a competitive return  on equity by  effectively leveraging its
portfolio against the risks associated  with  interest rates and credit.  The HPFS business model is  asset-
intensive and uses certain internal metrics to measure its performance against  other financial  services
companies, including a segment balance sheet that is derived from our  internal management  reporting
system. The accounting policies used to derive  these amounts are substantially the same  as those  used
by the consolidated company. However,  certain intercompany loans and  accounts that are reflected in
the segment balances are eliminated  in  our Consolidated  Financial  Statements.

The portfolio assets and ratios derived from the segment balance sheet for HPFS were as follows

for the following fiscal years ended October 31:

Portfolio assets(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease equipment reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2009

2008

In millions

$10,017

$8,297

108
71

179

90
60

150

Net portfolio assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 9,838

$8,147

Reserve coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt to equity ratio(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.8% 1.8%
7.0x

6.5x

(1) Portfolio assets include gross financing receivables of approximately  $6.1 billion  and $5.1  billion at

October 31, 2009 and October 31, 2008 and net equipment  under operating leases of $2.2 billion
and $1.8 billion at October 31, 2009 and October 31,  2008, as disclosed in Note 11 to the

65

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

Consolidated Financial Statements in  Item 8, which  is incorporated herein by reference. Portfolio
assets also include capitalized profit  on intercompany equipment transactions of approximately
$700 million at October 31, 2009 and  October 31, 2008, and intercompany leases of approximately
$1.0 billion and $800 million at October 31, 2009 and October 31, 2008, both of which  are
eliminated in consolidation.

(2) Allowance for doubtful accounts includes both  the short-term  and the long-term  portions of the

allowance on financing receivables.

(3) HPFS debt consists of intercompany equity that is treated as debt for segment reporting  purposes,

intercompany debt and debt issued directly by  HPFS.

Net portfolio assets at October 31, 2009 increased 20.8% from October 31, 2008.  The increase
resulted from higher levels of financing originations in fiscal 2009 and a favorable currency impact. The
overall percentage of portfolio assets  reserves remained flat due to continued strong  portfolio
performance. HPFS funds its operations mainly  through  a combination of intercompany debt and
equity. In addition to the balances reflected above, HP assumed net portfolio assets of $51 million
through the acquisition of EDS.

Rollforward of Reserves:

October 31,
2008

Additions to
allowance

Deductions,
net of
recoveries

October 31,
2009

In millions

Allowance for doubtful accounts . . . . . . . . . . . . . . . . .
Operating lease equipment reserve . . . . . . . . . . . . . . .

Total reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 90
60

$150

$63
19

$82

$(45)
(8)

$(53)

$108
71

$179

Corporate Investments

For the fiscal years ended October 31

2009

2008

2007

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) earnings from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) earnings from operations as a %  of net  revenue . . . . . . . . . . .

$ 768
$ (56)

(7.3)%

In millions
$965
$ 49

5.1%

$ 762
$ (57)
(7.5)%

Net revenue in Corporate Investments relates primarily to network infrastructure  products sold
under the brand ‘‘ProCurve Networking.’’  In fiscal 2009,  revenue from network infrastructure products
decreased 19.6% as compared to fiscal 2008, resulting from the slowdown in  the networking market
and a resulting decrease in sales of enterprise ethernet  switch  products. Partially offsetting the revenue
decline  was revenue resulting from the  acquisition  of Colubris  Networks, Inc.  (‘‘Colubris’’), which HP
acquired in October 2008.

Corporate Investments reported a loss  from operations  in fiscal  2009 as compared  to  the positive

earnings from operations reported in  fiscal 2008  due  primarily  to  lower earnings  from operations
generated by  network infrastructure products. Gross margin in Corporate Investments declined for
fiscal 2009 as the result of a unit volume decline in the  sale of network infrastructure products  and

66

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

competitive pricing pressure. The loss  from operations  in  Corporate Investments was also impacted by
expenses carried in the segment associated  with  corporate development, global alliances  and HP Labs,
which  declined from fiscal 2008.

In fiscal  2008, the majority of the net revenue in Corporate Investments related to network
infrastructure products sold under the  brand ‘‘ProCurve Networking,’’ which grew  26.2% from fiscal
2007 as the result of continued increased  sales of enterprise class gigabit and 10 gigabit Ethernet  switch
products. Fiscal 2008 network infrastructure revenue included a small amount of revenue from
Colubris.

Corporate Investments reported earnings from  operations in fiscal 2008 as compared to losses in

fiscal 2007 due primarily to increased earnings from operations generated by network infrastructure
products, and operating expenses related to HP Labs was flat as compared to fiscal 2007.

LIQUIDITY AND CAPITAL RESOURCES

Our cash balances are held in numerous locations throughout the world, including  substantial
amounts held outside of the United States. Most  of  the amounts held outside  of the United  States
could be repatriated to the United States  but, under current  law,  would be subject to United States
federal income taxes, less applicable  foreign tax credits. Repatriation of some foreign balances is
restricted by local laws. We have provided for the  United  States federal tax liability on these amounts
for financial statement purposes, except  for foreign earnings that are considered indefinitely reinvested
outside of the United States. Repatriation could  result in additional United States federal income tax
payments in future years. Where local restrictions prevent  an efficient intercompany transfer of funds,
our  intent is that cash balances would remain outside of the United States and  we would  meet United
States liquidity needs through ongoing  cash flows,  external borrowings,  or both. We utilize  a variety  of
tax planning and financing strategies in an effort to ensure that our worldwide cash is available in the
locations in which it is needed.

The information discussed below is presented based  on  our historical results, which include the

results of EDS for the period following the August 26, 2008 closing date of the acquisition.

LIQUIDITY

We  use cash generated by operations  as our primary source of liquidity;  we believe that internally

generated cash flows are generally sufficient to support business operations, capital expenditures and
the payment of stockholder dividends,  in addition to a level of discretionary investments and share
repurchases. We are able to supplement  this  near-term liquidity,  if necessary, with broad access to
capital markets and credit line facilities  made available  by various foreign and  domestic  financial

67

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

institutions. Our liquidity is subject to  various risks including the market risks identified  in the section
entitled ‘‘Qualitative and Quantitative Disclosures  about Market Risk’’ in  Item 7A.

For the fiscal years ended October 31

2009

2008

2007

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available borrowing resources(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$13.3
$15.8
$18.1

In billions
$10.2
$17.9
$11.7

$11.3
$ 8.2
$10.3

(1)

In addition to these available borrowing resources,  we  are  able  to  offer for sale, from time to time,
in one or more offerings, an unspecified amount of debt securities, common stock, preferred stock,
depositary shares and warrants under  the 2009  Shelf  Registration Statement.

Our cash position remains strong, and we believe our  cash balances are sufficient to cover cash

outlays expected in fiscal 2010.

Cash Flows

The following table summarizes the key cash flow  metrics  from our consolidated statements of

cash flow:

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . .

$13,379
(3,580)
(6,673)

In millions
$ 14,591
(13,711)
(2,020)

$ 9,615
(9,123)
(5,599)

Net increase (decrease) in cash and cash equivalents . . . . . . . . . . .

$ 3,126

$ (1,140)

$(5,107)

For the fiscal years ended October 31

2009

2008

2007

Operating Activities

Net cash provided by operating activities  decreased by approximately $1.2  billion for fiscal 2009, as

compared to fiscal 2008. The decrease  was due primarily to increased utilization of  cash resources for
payment of operating liabilities such  as accounts payable, other current liabilities and restructuring
along with a decrease in net earnings, the impact of which  was  partially offset by the  increased
generation of cash resources through the  utilization  of  operating assets  such as inventory  and other
current assets along with increased amortization expense. Net cash  provided by operating activities
increased by approximately $5.0 billion  for fiscal 2008,  as compared to fiscal 2007. The increase was
due primarily to higher net earnings  in fiscal 2008, a decrease  in accounts  and financing receivables,
and increased accounts payable.

68

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

Our key working capital metrics are  as follows:

October 31

2009

2008

2007

Days of sales outstanding in accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . .
Days of supply in inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Days of purchases outstanding in accounts payable(1).
. . . . . . . . . . . . . . . . . . . . . . .

48
23
(57)

45
27
(52)

43
34
(53)

Cash conversion cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14

20

24

(1) Beginning in the second quarter of fiscal 2009, we reclassified certain  activity within  Other accrued
liabilities to Accounts payable as this better represents the nature of the activity. All prior periods
have been revised to conform to the current  presentation.

Days of sales outstanding in accounts receivable (‘‘DSO’’) measures the average number of  days

our  receivables are outstanding. DSO  is  calculated by dividing ending accounts receivable, net of
allowance for doubtful accounts, by a  90-day average  net revenue.  Our accounts receivable balance was
$13.4 billion as of October 31, 2007.

Days of supply in inventory (‘‘DOS’’) measures the average number of days  from procurement to
sale of our product. DOS is calculated  by  dividing  ending inventory  by a 90-day average cost  of goods
sold. Our inventory balance was $8.0  billion  as  of  October 31, 2007.

Days of purchases outstanding in accounts payable (‘‘DPO’’)  measures the average number of days

our  accounts payable balances are outstanding.  DPO is calculated by dividing ending accounts payable
by a 90-day average cost of goods sold. Our accounts payable balance was  $12.4 billion as of
October 31, 2007.

Our working capital requirements depend upon our  effective management of the  cash conversion

cycle, which represents effectively the  number  of  days  that elapse from the day we pay for the purchase
of raw materials to the collection of  cash from our customers. The cash conversion cycle is  the sum of
DSO and DOS less DPO.

The cash conversion cycle for fiscal 2009 decreased by 6 days as compared to fiscal 2008. The
increase in DSO was due primarily to our  improving penetration into the enterprise market which
tends to have a higher DSO profile, optimizing terms to drive shareholder value as well as more sales
in the month of October. The decrease in DOS was due to lower inventory levels  driven primarily by
improved inventory management. The increase in DPO  was  due primarily  to a change in purchasing
linearity in the fourth quarter.

The cash conversion cycle for the fiscal 2008 decreased by 4  days as compared  to  fiscal 2007. The

increase in DSO was due primarily to a higher  accounts receivable balance during the fourth quarter of
fiscal 2008 compared to the same period in fiscal  2007 and the effect of the  EDS acquisition. The
decrease in DOS was due primarily to  more efficient  inventory management, higher cost of goods sold
during the fourth quarter of 2008 as  a result of increased revenues and the effect of the EDS
acquisition. The slight decrease in DPO was due to the effect of the EDS acquisition.

Investing Activities

Net cash used in investing activities decreased by approximately $10.1 billion for fiscal 2009 as
compared to fiscal 2008 due primarily to higher cash payments made in connection with fiscal 2008

69

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

acquisitions and increased by approximately $4.6 billion for fiscal 2008, as compared to fiscal  2007 due
to fiscal 2008 acquisition activity.

Financing Activities

Net cash used in financing activities increased by  approximately $4.7 billion for fiscal  2009, as
compared to fiscal 2008. The increase was  due primarily to higher net repayments of commercial paper
and debt, the impact of which was partially offset by decreased repurchases of our common stock. Net
cash used in financing activities decreased  by approximately $3.6 billion for fiscal 2008,  as compared to
fiscal 2007. The decrease was due primarily to higher net  issuance  of commercial paper and debt.

For more information on our share repurchase programs,  see Item 5 and Note 15 to the

Consolidated Financial Statements in  Item 8, which  are incorporated herein by reference.

CAPITAL RESOURCES

Debt Levels

Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt-equity ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . .

For the fiscal years ended October 31

2009

2008

2007

In millions, except
interest rates and ratios
$10,176
$ 7,676
0.46x
3.6%

$ 1,850
$13,980
0.39x
2.7%

$3,186
$4,997
0.21x
5.3%

We  maintain debt levels that we establish through consideration of a number  of factors, including

cash flow expectations, cash requirements for operations, investment plans (including acquisitions),
share repurchase activities, overall cost of  capital, and targeted capital structure.

In fiscal  2009 short-term debt decreased by $8.3  billion and  long-term debt increased by

$6.3 billion as compared to fiscal 2008. This was primarily  due to the replacement of short-term  debt
with long-term debt as capital market conditions improved from last year,  which was partially offset by
a reclassification of $1 billion from long-term to short-term. Short-term debt and long-term debt
increased by $7.0 billion and $2.7 billion respectively, for  fiscal  2008 as compared to fiscal 2007. The
net increase in total debt is due mainly to commercial paper issued in conjunction with the  EDS
acquisition.

Our debt-equity ratio is calculated as  the carrying  value of debt divided by the carrying value  of
equity. Our debt-equity ratio decreased by 0.07x in fiscal  2009,  due primarily  to  the net repayment of
$2.0 billion debt. It increased by 0.25x in fiscal  2008 due primarily  to  funding the EDS acquisition by
debt.

Our weighted-average interest rate reflects the average effective rate on our  borrowings prevailing
during the year; it factors in the impact  of  swapping some of our  global notes  with fixed interest rates
for global notes with floating interest rates. For more  information on our interest rate  swaps, see
Note 10 to the Consolidated Financial Statements in Item 8, which  is incorporated herein by reference.
The slightly lower weighted average interest  rates  over the past  three  years is a  result of the
combination of lower market interest rates and swapping some of our fixed interest obligations

70

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

associated with some of our fixed global notes for variable  rate obligations  through interest rate swaps
in a declining rates environment.

For more information on our borrowings,  see  Note 13  to  the Consolidated Financial Statements in

Item 8, which is incorporated herein  by reference.

Available  Borrowing Resources

At October 31, 2009, we had the following resources  available to obtain short-term or long-term

financings if we need additional liquidity:

2009 Shelf Registration Statement(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial paper programs(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Uncommitted lines of credit(3)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revolving trade receivables-based facilities(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

At October 31, 2009

In millions
Unspecified
16,200
1,600
269

(1)

In May 2009, we filed a shelf registration  statement  (the  ‘‘2009 Shelf Registration Statement’’) with
the SEC to enable us to offer for sale, from time to time and as the capital  markets  permit, in one
or more offerings, an unspecified amount of debt securities, common stock, preferred  stock,
depositary shares and warrants.

(2) Our commercial paper programs are supported by various credit  facilities,  including a  $3.5 billion
credit facility expiring in February 2010 and a $2.9 billion credit facility expiring in May 2012. Our
ability to have a U.S. commercial paper outstanding balance that exceeds the  $6.4 billion
supported by our credit facilities is subject to a number of factors, including liquidity conditions
and business performance. HP also has registered  for the  Commercial Paper Funding Facility
(‘‘CPFF’’) provided by the Federal Reserve Bank of New York, which would enable HP to issue
three-month unsecured commercial paper through a  special purpose vehicle  of the Federal
Reserve. The maximum amount of commercial  paper  that HP may issue at any time through this
program is $10.4 billion less the total principal amount of  all other outstanding commercial paper
that HP has issued. The CPFF program is currently scheduled to expire on February 1, 2010. As of
October 31, 2009, HP had not issued any  commercial  paper  under the CPFF  program. See
Note 13 to the Consolidated Financial Statements, which is incorporated herein by reference, for
additional information about these credit  facilities and the  CPFF program.

(3) HP maintains uncommitted lines of credit from a number of financial institutions that are available

through various foreign subsidiaries.

(4) We have revolving trade receivables-based  facilities permitting us  to  sell  certain  trade receivables
to third parties on a non-recourse basis. The  aggregate maximum capacity  under these programs
was $568 million as of October 31, 2009.

71

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

Credit Ratings

Our credit risk is evaluated by three independent rating agencies based upon publicly available
information as well as information obtained  in  our ongoing discussions  with them. The ratings for the
fiscal year ended October 31, 2009 were:

For the fiscal year ended October 31, 2009

Standard & Poor’s Moody’s Investors

Ratings Services

Service

Fitch Ratings
Services

Short-term debt ratings . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . .
Long-term debt ratings

A-1
A

Prime-1
A2

F1
A+

We  do not have any rating downgrade triggers that would  accelerate  the maturity of a  material
amount of our debt. However, a downgrade in our credit rating would increase  the cost of  borrowings
under our credit facilities. Also, a downgrade in our credit rating could limit our ability to issue
commercial paper under our current programs. If this occurs,  we would seek  alternative sources of
funding, including drawdowns under  our  credit facilities or the issuance of notes under our existing
shelf registration statements.

CONTRACTUAL AND OTHER OBLIGATIONS

The impact that we expect our contractual and other obligations as of October 31, 2009  to  have on

our  liquidity and cash flow in future  periods  is as follows:

Payments Due by Period

Total

Less than
1 Year

1-3 Years

3-5  Years

More than
5 Years

Principal payments on long-term debt(1) . . . . . . . . .
Interest payments on long-term debt(2) . . . . . . . . . .
Operating lease obligations . . . . . . . . . . . . . . . . . .
Purchase obligations(3) . . . . . . . . . . . . . . . . . . . . . .
Capital lease obligations . . . . . . . . . . . . . . . . . . . .

$14,203
1,772
3,412
2,033
568

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$21,988

$1,027
386
949
1,775
134

$4,271

In millions
$5,403
661
1,244
224
142

$7,674

$6,119
328
597
31
62

$7,137

$1,654
397
622
3
230

$2,906

(1) Amounts represent the expected principal  cash payments relating to our long-term debt and do not

include any fair value adjustments or discounts and premiums.

(2) Amounts represent the expected interest cash payments  relating to our long-term debt. We  have
outstanding interest rate swap agreements accounted for as fair value hedges that have the
economic effect of modifying the fixed  interest obligations  associated with some of  our fixed global
notes for variable rate obligations. The impact of  these interest rate swaps was factored into the
calculation of the future interest payments on  long-term debt.

(3) Purchase obligations include agreements  to  purchase goods or services that  are enforceable  and
legally binding on us and that specify all significant terms, including fixed or minimum quantities
to be purchased; fixed, minimum or variable price  provisions; and the approximate timing  of the
transaction. Purchase obligations exclude agreements that are cancelable without penalty. These
purchase obligations are related principally to inventory  and other items.

72

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management’s Discussion and Analysis of
Financial Condition  and Results of Operations  (Continued)

In addition to the above, at October 31, 2009, we had approximately $1.3 billion of recorded
liabilities and related interest and penalties pertaining  to  uncertainty in income tax positions, which will
be partially offset by $58 million of deferred tax  assets  and  interest receivable. These liabilities  and
related interest and penalties include  $19 million expected to be paid within one year. For the
remaining amount, we are unable to make a reasonable  estimate as to when cash settlement with the
tax authorities might occur due to the uncertainties  related to these tax matters. See Note 14 to the
Consolidated Financial Statements in  Item 8, which  is incorporated herein by reference, for additional
information on taxes.

Funding Commitments

In fiscal  2010, we expect to contribute  approximately  $820 million to our pension and

post-retirement plan funding. Our funding policy  is to contribute  cash to our pension plans  so that we
meet at least  the minimum contribution requirements, as established by local government, funding and
taxing authorities. Funding for the years following  2010  would be based  on the then  current market
conditions, actuarial estimates and plan funding status. See Note 16 to the Consolidated Financial
Statements in Item 8, which is incorporated  herein by reference, for additional information  on pension
activity.

As a result of our approved restructuring plans,  we expect future cash expenditures of

approximately $1.9 billion. We expect to make cash payments of approximately $1.1 billion  in fiscal
2010 and the majority of the remaining  amount through 2012. See Note 8  to  the Consolidated
Financial Statements in Item 8, which is  incorporated herein by reference, for additional information
on restructuring activities.

Guarantees and Indemnifications

See Note 12 to the Consolidated Financial Statements in Item 8, which is incorporated herein by

reference, for additional information  on liabilities  that may arise  from guarantees  and indemnifications.

Litigation and Contingencies

See Note 18 to the Consolidated Financial Statements in Item 8, which is incorporated herein by

reference, for additional information  on liabilities  that may arise  from litigation and  contingencies.

Off-Balance Sheet Arrangements

As part of our ongoing business, we have not participated in transactions that generate  material

relationships with unconsolidated entities  or  financial partnerships, such as  entities often referred  to  as
structured finance or special purpose  entities  (‘‘SPEs’’), which would have been established for the
purpose of facilitating off-balance sheet  arrangements or other contractually narrow or limited
purposes. As of October 31, 2009, we  are  not  involved in  any  material unconsolidated SPEs. 

73

ITEM 7A. Quantitative and Qualitative Disclosures  About  Market Risk.

In the normal course of business, we  are  exposed to foreign  currency exchange  rate, interest rate

and equity price risks that could impact  our financial position and results of operations. Our risk
management strategy with respect to these  three market risks may include the  use of derivative
financial instruments. We use derivative  contracts only to manage existing  underlying  exposures of  HP.
Accordingly, we do not use derivative  contracts for speculative purposes. Our  risks, risk management
strategy and a sensitivity analysis estimating the effects  of changes in  fair values for each of these
exposures are outlined below.

Actual gains and losses in the future may differ  materially from the sensitivity  analyses based on

changes in the timing and amount of interest rate,  foreign currency exchange rate  and equity price
movements and our actual exposures  and  hedges.

Foreign currency exchange rate risk

We  are exposed to foreign currency exchange  rate  risk inherent in our sales commitments,

anticipated sales, anticipated purchases and  assets, liabilities and debt denominated in  currencies  other
than the U.S. dollar. We transact business  in approximately 40 currencies worldwide, of which  the most
significant to our operations for fiscal 2009 were  the euro,  the  Japanese  yen and the British  pound. For
most currencies, we are a net receiver  of the  foreign currency and  therefore benefit  from a weaker U.S.
dollar and are adversely affected by a stronger U.S. dollar relative to the  foreign currency. Even where
we are a net receiver, a weaker U.S. dollar may  adversely affect certain expense  figures taken alone.
We  use a combination of forward contracts and  options  designated as  cash flow hedges to protect
against the foreign currency exchange rate risks  inherent in  our forecasted  net revenue and, to a lesser
extent, cost of sales and inter-company  lease loan denominated in currencies other  than the U.S. dollar.
In addition, when debt is denominated  in  a  foreign currency, we  may  use swaps to exchange the foreign
currency principal and interest obligations  for U.S. dollar-denominated amounts  to  manage  the
exposure to changes in foreign currency  exchange rates. We also use other derivatives not designated as
hedging instruments consisting primarily of forward contracts  to  hedge foreign currency balance sheet
exposures. For these types of derivatives  and  hedges we recognize the  gains and losses on these foreign
currency forward contracts in the same  period as the  remeasurement losses and gains  of  the related
foreign currency-denominated exposures. Alternatively, we  may  choose not to hedge  the foreign
currency risk associated with our foreign currency exposures, primarily  if such exposure acts  as a
natural foreign currency hedge for other offsetting amounts denominated in  the same currency or  the
currency is difficult or too expensive  to  hedge.

We  have performed sensitivity analyses as  of October 31, 2009  and 2008, using  a modeling
technique that measures the change in  the fair values arising from a hypothetical 10% adverse
movement in the levels of foreign currency exchange rates relative to the U.S. dollar, with all other
variables held constant. The analyses cover  all  of our foreign currency  contracts offset by the underlying
exposures. The foreign currency exchange rates  we used were based on market rates in  effect  at
October 31, 2009 and 2008. The sensitivity analyses indicated  that a hypothetical 10%  adverse
movement in foreign currency exchange rates would result  in a foreign exchange  loss of  $106 million
and $141 million at October 31, 2009  and  October 31, 2008, respectively.

Interest rate risk

We  also are exposed to interest rate risk related to our debt and investment portfolios and
financing receivables. We issue long-term  debt  in either U.S. dollars  or  foreign currencies based on
market conditions at the time of financing. We then  typically use  interest rate and/or  currency  swaps  to
modify  the market risk exposures in connection with  the debt to achieve primarily U.S.  dollar LIBOR-
based floating interest expense. The swap  transactions generally involve  the exchange  of fixed for

74

floating interest payments. However,  we  may choose not to swap fixed for floating interest payments  or
may terminate a previously executed  swap  if  we believe a larger proportion of fixed-rate debt would be
beneficial. In order to hedge the fair value of certain  fixed-rate investments, we may enter  into  interest
rate swaps that convert fixed interest returns  into variable interest  returns. We may  use cash flow
hedges to hedge the variability of LIBOR-based interest income  received on certain  variable-rate
investments. We may also enter into interest  rate swaps that convert variable rate interest returns into
fixed-rate interest returns.

We  have performed sensitivity analyses as  of October 31, 2009  and 2008, using  a modeling
technique that measures the change in  the fair values arising from a hypothetical 10% adverse
movement in the levels of interest rates  across the  entire yield curve,  with all other  variables held
constant. The analyses cover our debt, investment  instruments, financing  receivables and  interest  rate
swaps. The analyses use actual maturities  for the debt, investments  and interest rate swaps  and
approximate maturities for financing  receivables. The discount rates we used  were based on the  market
interest rates in effect at October 31, 2009 and 2008.  The  sensitivity analyses indicated that a
hypothetical 10% adverse movement  in interest rates  would result in a  loss in  the fair values of our
debt, investment instruments and financing receivables, net of  interest rate swap positions, of
$33 million at October 31, 2009 and  $9  million at October  31, 2008.

Equity price risk

We  are also exposed to equity price risk inherent in our portfolio of  publicly-traded  equity
securities, which had an estimated fair  value of  $5 million at October 31,  2009 and  $5 million at
October 31, 2008. We monitor our equity  investments for  impairment  on a  periodic  basis. Generally, we
do not attempt to reduce or eliminate  our  market  exposure on  these equity securities. However, we
may use derivative transactions to hedge certain positions  from time to time.  We do not purchase our
equity securities with the intent to use  them for speculative  purposes. A hypothetical 30% adverse
change in the stock prices of our publicly-traded equity securities would result in  a loss  in the fair
values of our marketable equity securities of $1 million at October 31, 2009 and $2 million at
October 31, 2008. The aggregate cost  of  privately-held companies,  marketable trading  securities and
other investments was $142 million at October 31, 2009 and $425 million at October 31, 2008.

75

ITEM 8. Financial Statements and Supplementary Data.

Table of Contents

Reports of Independent Registered Public  Accounting  Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Management’s Report on Internal Control  Over  Financial  Reporting . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Stockholders’  Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Note 1: Summary of Significant Accounting  Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Note 2: Stock-Based Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

77

79

80

81

82

83

84

84

95

Note 3: Net Earnings Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

102

Note 4: Balance Sheet Details . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

104

Note 5: Supplemental Cash Flow Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

106

Note 6: Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

106

Note 7: Goodwill and Purchased Intangible Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

108

Note 8: Restructuring Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

110

Note 9: Fair Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

111

Note 10: Financial Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

115

Note 11: Financing Receivables and Operating  Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

121

Note 12: Guarantees

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Note 13: Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Note 14: Taxes on Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

122

123

126

Note 15: Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

132

Note 16: Retirement and Post-Retirement  Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

135

Note 17: Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

143

Note 18: Litigation and Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

144

Note 19: Segment Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

152

Quarterly Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

161

76

Report of Independent Registered Public  Accounting Firm

To the Board of Directors and Stockholders of

Hewlett-Packard Company

We  have audited the accompanying consolidated balance sheets of Hewlett-Packard Company and

subsidiaries as of October 31, 2009 and 2008,  and  the related consolidated statements  of  earnings,
stockholders’ equity and cash flows for each  of  the three  years in the period ended October 31, 2009.
Our audits also included the financial  statement  schedule  listed in  the Index at Item 15(a)(2). These
financial statements and schedule are  the  responsibility of the Company’s management. Our
responsibility is to express an opinion  on  these  financial statements and  schedule based  on our audits.

We  conducted our audits in accordance with the standards  of  the Public Company Accounting
Oversight Board (United States). Those  standards require that we  plan and perform the audit to obtain
reasonable assurance about whether  the  financial  statements are free  of material misstatement.  An
audit includes examining, on a test basis, evidence  supporting the amounts and disclosures  in the
financial statements. An audit also includes assessing the accounting  principles used  and significant
estimates made by management, as well as  evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable  basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects,
the consolidated financial position of  Hewlett-Packard Company and subsidiaries at October 31, 2009
and 2008, and the consolidated results of  their  operations and their cash flows for  each  of the three
years in the period ended October 31, 2009, in conformity with  U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,  when considered in  relation to
the basic financial statements taken as a whole, presents fairly in  all material  respects the information
set forth therein.

As discussed in Note 1 to the consolidated financial statements, in  fiscal year  2009, Hewlett-
Packard Company changed its method  of accounting for revenue recognition with the  adoption  of
amendments to the Financial Accounting  Standards Board (‘‘FASB’’) Accounting Standards
Codification (‘‘ASC’’) resulting from  Accounting  Standards Update No. 2009-13, Multiple-Deliverable
Revenue Arrangements, and Accounting Standards  Update No. 2009-14, Certain Revenue  Arrangements
That Include Software Elements, both adopted effective  November 1, 2008 and  its method of accounting
for the measurement date provisions for  its defined benefit postretirement plans in accordance with the
guidance provided in FASB Statement No. 158, Employers’ Accounting  for Defined  Benefit Pension and
Other Postretirement Plans—An Amendment  of  FASB  No. 87,  88, 106 and 132(R) (codified primarily  in
FASB ASC Topic 715, Compensation—Retirement  Benefits). In fiscal year 2008, Hewlett-Packard
Company changed its method of accounting  for income taxes in accordance with the guidance provided
in FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement No. 109 (codified primarily  in  FASB ASC Topic 740, Income Taxes).  In fiscal  year 2007,
Hewlett-Packard Company changed its method of accounting  for defined benefit  postretirement plans
in accordance with the guidance provided  in FASB Statement  No. 158, Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans—An Amendment of  FASB  No. 87, 88, 106 and
132(R) (codified primarily in FASB ASC  Topic  715, Compensation—Retirement Benefits).

We  also have audited, in accordance  with the standards of  the Public Company Accounting

Oversight Board (United States), the  effectiveness of Hewlett-Packard  Company’s internal control over
financial reporting as of October 31,  2009, based  on criteria established  in Internal Control—Integrated
Framework issued by the Committee of  Sponsoring  Organizations of the Treadway Commission and our
report dated December 17, 2009, expressed an  unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

San Jose, California
December 17, 2009

77

Report of Independent Registered Public  Accounting Firm

To the Board of Directors and Stockholders of

Hewlett-Packard Company

We  have audited Hewlett-Packard Company’s  internal control over financial reporting as  of

October 31, 2009, based on criteria established in Internal Control-Integrated  Framework issued  by  the
Committee of Sponsoring Organizations  of  the Treadway Commission (the COSO criteria).  Hewlett-
Packard Company’s management is responsible for  maintaining effective internal control over financial
reporting, and for its assessment of the  effectiveness  of  internal control  over financial reporting
included in the accompanying Management’s  Report on Internal Control Over  Financial Reporting.
Our responsibility is to express an opinion  on the  Company’s internal  control over financial reporting
based on our audit.

We  conducted our audit in accordance with the standards of  the Public Company Accounting
Oversight Board (United States). Those  standards require that we  plan and perform the audit to obtain
reasonable assurance about whether  effective  internal control over financial reporting was maintained
in all material respects. Our audit included  obtaining an understanding  of internal control  over
financial reporting, assessing the risk that a  material weakness exists, testing and evaluating the design
and operating effectiveness of internal control based  on the assessed risk, and performing such other
procedures as we considered necessary in  the circumstances. We believe that our audit  provides a
reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide  reasonable

assurance regarding the reliability of  financial  reporting and the preparation  of  financial  statements  for
external  purposes in accordance with  generally accepted accounting  principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable  detail, accurately and fairly reflect the  transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions  are
recorded  as necessary to permit preparation of financial statements in  accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made  only
in accordance with authorizations of management and directors of the company; and  (3) provide
reasonable assurance regarding prevention  or timely detection of unauthorized acquisition, use or
disposition of the company’s assets that  could have a material effect on the financial statements.

Because of its inherent limitations, internal control over  financial  reporting may not prevent or

detect misstatements. Also, projections  of any evaluation  of  effectiveness to future periods are  subject
to the risk that controls may become inadequate  because of changes in conditions, or  that  the degree
of compliance with the policies or procedures may deteriorate.

In our opinion, Hewlett-Packard Company maintained,  in all material respects,  effective internal

control over financial reporting as of  October 31, 2009,  based on the COSO criteria.

We  also have audited, in accordance  with the standards of  the Public Company Accounting
Oversight Board (United States), the  accompanying  consolidated  balance  sheets  of Hewlett-Packard
Company and subsidiaries as of October 31, 2009  and  2008,  and the related  consolidated  statements of
earnings, stockholders’ equity and cash  flows for each of the  three years in the  period ended
October 31, 2009, and our report dated December 17, 2009,  expressed  an  unqualified  opinion thereon.

/s/ ERNST & YOUNG LLP

San Jose, California
December 17, 2009

78

Management’s Report on Internal Control  Over Financial Reporting

HP’s management is responsible for establishing and  maintaining adequate  internal control over

financial reporting for HP. HP’s internal  control over financial reporting is  a process  designed to
provide reasonable assurance regarding  the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with  U.S.  generally  accepted accounting
principles. HP’s internal control over  financial reporting includes  those policies and procedures that
(i) pertain to the maintenance of records that, in  reasonable detail, accurately and  fairly reflect  the
transactions and dispositions of the assets of  HP; (ii) provide  reasonable assurance that transactions  are
recorded  as necessary to permit preparation of financial statements in  accordance with generally
accepted accounting principles, and that receipts and expenditures of HP are  being  made only in
accordance with authorizations of management and directors  of  HP; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or  disposition of
HP’s assets that could have a material  effect on the financial  statements.

Because of its inherent limitations, internal control over  financial  reporting may not prevent or

detect misstatements. Also, projections  of any evaluation  of  effectiveness to future periods are  subject
to the risk that controls may become inadequate  because of changes in conditions, or  that  the degree
of compliance with the policies or procedures may deteriorate.

HP’s management assessed the effectiveness  of HP’s internal  control over financial reporting  as of

October 31, 2009, utilizing the criteria  set  forth by  the Committee of Sponsoring  Organizations  of the
Treadway Commission (COSO) in Internal Control-Integrated Framework.  Based on the  assessment by
HP’s management, we determined that HP’s  internal control over financial reporting was effective  as of
October 31, 2009. The effectiveness of  HP’s  internal  control over financial reporting as of October  31,
2009 has been audited by Ernst & Young  LLP, HP’s independent registered public accounting firm, as
stated in their report which appears on  page 78  of this  Annual Report on Form 10-K.

/s/ MARK V.  HURD

/s/ CATHERINE A. LESJAK

Mark V. Hurd
Chairman, Chief Executive Officer and  President
December 17, 2009

Catherine A. Lesjak
Executive  Vice President and Chief  Financial Officer
December 17, 2009

79

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Consolidated Statements of Earnings

For the fiscal years ended October 31

2009

2008

2007

In millions, except per share amounts

Net revenue:

Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 74,051
40,124
377

Total net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

114,552

$ 91,697
26,297
370

118,364

$ 84,229
19,699
358

104,286

Costs and expenses:

Cost of products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling,  general and administrative . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of purchased intangible assets . . . . . . . . . . . . . . . . . .
In-process research and development  charges . . . . . . . . . . . . . . . . .
Restructuring charges
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition-related  charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . .
Pension curtailments  and  pension  settlements, net

56,503
30,695
326
2,819
11,613
1,571
7
640
242
—

Total operating  expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

104,416

Earnings from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10,136

Interest and other, net

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(721)

Earnings before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net earnings per  share:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Weighted-average  shares used to compute  net  earnings per  share:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

$

9,415
1,755

7,660

3.21

3.14

2,388

2,437

69,342
20,028
329
3,543
13,326
967
45
270
41
—

107,891

10,473

—

10,473
2,144

8,329

3.35

3.25

2,483

2,567

$

$

$

63,435
14,959
289
3,611
12,430
783
190
387
—
(517)

95,567

8,719

458

9,177
1,913

7,264

2.76

2.68

2,630

2,716

$

$

$

The accompanying notes are an integral part of these  Consolidated Financial Statements.

80

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Consolidated Balance Sheets

October 31

2009

2008

In millions, except
par value

Current assets:

ASSETS

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 13,279
55
16,537
2,675
6,128
13,865

$ 10,153
93
16,928
2,314
7,879
14,361

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term financing receivables and other assets . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchased intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

52,539

11,262
11,289
33,109
6,600

51,728

10,838
10,468
32,335
7,962

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$114,799

$113,331

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Notes payable and short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes on earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and contingencies
Stockholders’ equity:

Preferred stock, $0.01 par value (300 shares authorized; none issued) . . . . . . .
Common stock, $0.01 par value (9,600 shares  authorized;  2,365 and  2,415

shares issued and outstanding, respectively) . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

1,850
14,809
4,071
910
6,182
1,109
14,072

43,003

13,980
17,299

$ 10,176
14,917
4,159
869
6,287
1,099
15,432

52,939

7,676
13,774

—

—

24
13,804
29,936
(3,247)

24
14,012
24,971
(65)

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

40,517

38,942

Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$114,799

$113,331

The accompanying notes are an integral part of these Consolidated  Financial Statements.

81

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the fiscal years ended October  31

2009

2008

2007

In millions

Cash flows from operating activities:

Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments  to  reconcile net earnings  to  net cash  provided  by operating

$ 7,660

$ 8,329

$ 7,264

activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based  compensation expense . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for doubtful  accounts — accounts  and financing  receivables .
Provision for inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension curtailments  and  pension  settlements,  net . . . . . . . . . . . . . . .
In-process research and development  charges . . . . . . . . . . . . . . . . . .
Deferred taxes  on earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax  benefit from  stock-based compensation . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in assets and liabilities:

Accounts and financing receivables . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes on earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,773
635
345
221
640
—
7
379
(162)
(54)

(549)
1,532
(153)
733
(1,237)
(1,391)

3,356
606
275
214
270
—
45
773
(293)
(61)

(264)
89
1,749
235
(165)
(567)

Net cash  provided by operating activities . . . . . . . . . . . . . . . . . .

13,379

14,591

Cash flows from investing activities:

Investment in property,  plant and equipment . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of  property, plant  and  equipment . . . . . . . . . . . . . .
Purchases of  available-for-sale  securities  and other  investments . . . . . . .
Maturities and  sales  of available-for-sale securities and other  investments .
Payments made in connection  with  business acquisitions,  net . . . . . . . . .

(3,695)
495
(160)
171
(391)

(2,990)
425
(178)
280
(11,248)

Net cash  used in investing activities . . . . . . . . . . . . . . . . . . . . . .

(3,580)

(13,711)

2,705
629
47
362
387
(517)
190
(74)
(481)
(138)

(2,808)
(633)
(346)
1,031
(606)
2,603

9,615

(3,040)
568
(283)
425
(6,793)

(9,123)

Cash flows from financing activities:

(Repayment) issuance  of commercial  paper and  notes payable,  net . . . . .
Issuance of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock under  employee  stock  plans . . . . . . . . . . . . .
Repurchase  of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit from stock-based compensation . . . . . . . . . . . . . . . .
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net cash  used in financing activities

. . . . . . . . . . . . . . . . . . . . .

Increase (decrease) in  cash  and cash  equivalents . . . . . . . . . . . . . . . . . . .
Cash and  cash equivalents at beginning  of period . . . . . . . . . . . . . . . . . .

(6,856)
6,800
(2,710)
1,837
(5,140)
162
(766)

(6,673)

3,126
10,153

5,015
3,121
(1,843)
1,810
(9,620)
293
(796)

(2,020)

(1,140)
11,293

1,863
4,106
(3,419)
3,103
(10,887)
481
(846)

(5,599)

(5,107)
16,400

Cash and  cash equivalents at end of  period . . . . . . . . . . . . . . . . . . . . . . .

$13,279

$ 10,153

$ 11,293

The accompanying notes are an integral part of these  Consolidated Financial Statements.

82

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

Common Stock

Number of
Shares

Par Value

Additional
Paid-in
Capital

Prepaid
stock

repurchase Earnings

Retained Comprehensive
(Loss) income

Total

Accumulated
Other

Balance October 31, 2006 . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . .

Net earnings

2,732,034

In millions, except number of shares in thousands
$(596)

$17,966

$

$27

$20,729
7,264

18

$ 38,144
7,264

Net unrealized loss on available-for-sale

securities . . . . . . . . . . . . . . . . . . . . . .
Net unrealized loss on cash flow hedges
. . . .
Minimum pension liability . . . . . . . . . . . . .
Cumulative translation adjustment . . . . . . . .

Comprehensive income . . . . . . . . . . . . . . . .

Issuance of common stock in connection with

employee stock plans and other

. . . . . . . . .
Repurchases of common stock . . . . . . . . . . . .
Net excess tax benefits from employee stock plans .
Dividends . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . .
Cumulative effect of change in accounting

principle . . . . . . . . . . . . . . . . . . . . . . .

Balance October 31, 2007 . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . .

Net earnings

Net unrealized loss on available-for-sale

securities . . . . . . . . . . . . . . . . . . . . . .
. . .

Net unrealized gain on cash flow hedges.
Unrealized components of defined benefit

pension plans . . . . . . . . . . . . . . . . . . .
Cumulative translation adjustment . . . . . . . .

Comprehensive income . . . . . . . . . . . . . . . .

Issuance of common stock in connection with

employee stock plans and other

. . . . . . . . .
Repurchases of common stock . . . . . . . . . . . .
Net excess tax benefits from employee stock plans .
Dividends . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . .
Cumulative effect of change in accounting

principle . . . . . . . . . . . . . . . . . . . . . . .

Balance October 31, 2008 . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . .

Net earnings

Net unrealized gain on available-for-sale

securities . . . . . . . . . . . . . . . . . . . . . .
. . . .

Net unrealized loss on cash flow hedges.
Unrealized components of defined benefit

pension plans . . . . . . . . . . . . . . . . . . .
Cumulative translation adjustment . . . . . . . .

Comprehensive income . . . . . . . . . . . . . . . .

Issuance of common stock in connection with

employee stock plans and other

. . . . . . . . .
Repurchases of common stock . . . . . . . . . . . .
Net excess tax benefits from employee stock plans .
Dividends . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . .
Cumulative effect of change in accounting

principle . . . . . . . . . . . . . . . . . . . . . . .

116,661
(268,981)

1
(2)

3,134
(5,878)
530

629

596

(5,587)

(846)

2,579,714

$26

$16,381

$ —

$21,560
8,329

65,235
(229,646)

(2)

2,034
(5,325)
316

606

2,415,303

$24

$14,012

$ —

69,157
(119,651)

1
(1)

1,783
(2,789)
163

635

(4,809)

(796)

687

$24,971
7,660

(1,922)

(766)

(7)

(12)
(18)
(3)
106

468

559

$

(16)
866

(538)
(936)

$

(65)

16
(971)

(2,531)
304

(12)
(18)
(3)
106

7,337

3,135
(10,871)
530
(846)
629

468

$ 38,526
8,329

(16)
866

(538)
(936)

7,705

2,034
(10,136)
316
(796)
606

687

$ 38,942
7,660

16
(971)

(2,531)
304

4,478

1,784
(4,712)
163
(766)
635

(7)

2,364,809

$24

$13,804

$ —

$29,936

$(3,247)

$ 40,517

The accompanying notes are an integral part of these  Consolidated Financial Statements.

83

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1: Summary of Significant Accounting Policies

Principles of Consolidation

The Consolidated  Financial Statements include  the accounts of Hewlett-Packard Company,  its

wholly-owned subsidiaries and its controlled majority-owned subsidiaries (collectively, ‘‘HP’’). HP
accounts for equity investments in companies over  which HP has the ability  to  exercise significant
influence, but does not hold a controlling  interest, under  the equity method,  and HP records its
proportionate share of income or losses in interest and  other, net in the Consolidated Statements  of
Earnings. HP has eliminated all significant intercompany accounts and transactions.

Business Combinations

HP has recorded all acquisitions using the  purchase  method of accounting and, accordingly, has

included the results of operations of acquired businesses in HP’s consolidated results from the  date of
each  acquisition. HP allocates the purchase price of its acquisitions to the tangible assets, liabilities  and
intangible assets acquired, including in-process research and development  (‘‘IPR&D’’) charges,  based
on their estimated fair values. The excess  purchase price over those  fair values is recorded  as goodwill.
The fair value assigned to assets acquired is based  on valuations using  management’s estimates and
assumptions.

HP will adopt new accounting standards issued  by the Financial Accounting Standards Board
(‘‘FASB’’) for business combinations  in the  first quarter  of fiscal 2010. Changes to the purchase method
of accounting for business combinations  are  discussed further in Accounting  Pronouncements  in this
Note.

Reclassifications and Segment Reorganization

Certain reclassifications have been made  to  prior-year  amounts in order to conform to current year

presentation.

HP has made certain organizational  realignments in order  to optimize its  operating structure.

Reclassifications of prior year financial information have  been made  to  conform to the  current year
presentation. None of the changes impacts HP’s previously reported  consolidated  net revenue, earnings
from operations, net earnings or net earnings  per  share.  See  Note 19  for a  further discussion of HP’s
segment reorganization, which is incorporated herein  by reference.

HP has made certain reclassifications of  its Consolidated Statements of Earnings for the fiscal

years ended October 31, 2008 and October 31, 2007 to provide improved visibility  and comparability
with the current year presentation. This change does not affect previously reported results of operations
for any period presented. Certain pursuit-related costs  previously reported as cost of services have been
realigned retroactively to selling, general and administrative expenses  due to organizational
realignments.

HP has revised the presentation of its  Consolidated  Statements of Cash Flows  for the  fiscal years

ended October 31, 2008 and October 31,  2007  to  reflect revisions  to  the current and deferred  tax
provisions in those years related to the  presentation of tax benefits  of stock option  plans, as described
in Note 14. The revisions result in an increase in the change  in taxes on earnings and a decrease in the
adjustment to deferred taxes on earnings  within  cash flows from  operating activities on the
Consolidated Statements of Cash Flows.  These revisions do not affect previously reported results of
operations, financial position or net cash provided by  operating activities for  any period presented.

84

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 1:  Summary of Significant Accounting  Policies  (Continued)

Use of Estimates

The preparation of financial statements in  accordance with U.S. generally accepted accounting
principles (‘‘GAAP’’) requires management to make estimates  and assumptions that affect the amounts
reported in HP’s Consolidated Financial Statements  and accompanying notes.  Actual  results could
differ materially from those estimates.

Revenue Recognition

Net revenue is derived primarily from the  sale of products and services. The following  revenue

recognition policies define the manner in which  HP accounts for  sales  transactions.

HP recognizes revenue when persuasive evidence of a sales arrangement exists, delivery has
occurred or services are rendered, the sales price or fee  is fixed or determinable and collectibility is
reasonably assured. Additionally, HP recognizes hardware revenue on sales to channel partners,
including resellers, distributors or value-added  solution providers at the time of sale  and when the
channel partners have economic substance apart from HP and HP has completed its obligations related
to the sale.

In October 2009, the FASB issued Accounting Standards  Update (‘‘ASU’’)  No. 2009-13,  ‘‘Multiple-
Deliverable Revenue Arrangements’’  (‘‘ASU 2009-13’’). The  new  standard  changes the requirements for
establishing separate units of accounting in  a  multiple  element  arrangement and  requires the allocation
of arrangement consideration to each deliverable  to  be  based on the  relative selling price. Concurrently
to issuing ASU 2009-13, the FASB also issued ASU No. 2009-14, ‘‘Certain Revenue Arrangements  That
Include Software Elements’’ (‘‘ASU 2009-14’’). ASU 2009-14  excludes software that is  contained on  a
tangible product from the scope of software revenue  guidance if  the software  is essential to the tangible
product’s functionality.

HP early adopted these standards as of the beginning of fiscal 2009 for new and  materially
modified deals originating after November 1, 2008; therefore, the previously reported  quarterly results
have  been restated to reflect the impact of adoption. As a result of the adoption,  fiscal  2009 net
revenues and net earnings were higher by $255 million and $55 million, respectively.  The  impact  was
due to the recognition of revenue previously deferred for certain deliverables bundled in multiple
element arrangements where the arrangements also included  services  for  which HP was  unable to
demonstrate fair value pursuant to the previous standards. The new standards  allow  for deliverables  for
which revenue was previously deferred to be separated and recognized  as delivered,  rather than  over
the longest service delivery period as a single unit with other elements  in the  arrangement. HP is  not
able  to reasonably estimate the effect  of adopting  these  standards  on  future financial periods as the
impact  will vary based on the nature and volume of new or materially  modified deals  in any given
period.

For fiscal 2009 and future periods, pursuant to the guidance of ASU  2009-13,  when a sales

arrangement contains multiple elements, such as hardware and software products, licenses and/or
services, HP allocates revenue to each  element based on a selling price hierarchy.  The selling  price for
a deliverable is based on its vendor specific objective evidence  (‘‘VSOE’’) if available, third party
evidence (‘‘TPE’’) if VSOE is not available,  or estimated selling  price (‘‘ESP’’)  if neither VSOE nor
TPE is available. In multiple element  arrangements where more-than-incidental  software deliverables
are included, revenue is allocated to each separate unit of accounting for  each of the non-software

85

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 1:  Summary of Significant Accounting  Policies  (Continued)

deliverables and to the software deliverables  as a  group using the relative selling prices of  each  of the
deliverables in the  arrangement based  on  the aforementioned selling price hierarchy. If  the
arrangement contains more than one  software deliverable, the arrangement consideration  allocated to
the software deliverables as a group is then allocated  to  each  software deliverable using  the guidance
for recognizing software revenue, as  amended.

HP limits the amount of revenue recognition for delivered elements  to  the amount that is  not
contingent on the future delivery of products or services, future performance obligations or subject  to
customer-specified return or refund privileges.

HP evaluates each deliverable in an arrangement to determine whether they represent separate

units of accounting. A deliverable constitutes a separate unit of accounting when it has  standalone
value and there are no customer-negotiated refund or  return rights for  the delivered elements. If the
arrangement includes a customer-negotiated refund or return right  relative to the  delivered  item and
the delivery and performance of the undelivered item  is considered  probable and  substantially  in HP’s
control, the delivered element constitutes  a separate unit of accounting. In instances  when the
aforementioned criteria are not met,  the deliverable  is combined with  the undelivered elements and the
allocation of the arrangement consideration  and  revenue recognition  is determined for the combined
unit as a  single unit. Allocation of the consideration  is determined  at  arrangement inception on the
basis of each unit’s relative selling price.

HP establishes VSOE of selling price using the price  charged for  a  deliverable when  sold

separately and, in rare instances, using the  price established  by management having the relevant
authority. TPE of selling price is established by  evaluating largely similar and interchangeable
competitor products or services in standalone  sales  to  similarly  situated  customers. The best estimate of
selling price is established considering  internal  factors such as margin objectives, pricing practices and
controls, customer segment pricing strategies and the product lifecycle.  Consideration  is also  given to
market conditions such as competitor pricing strategies  and industry  technology lifecycles.

For fiscal 2008 and fiscal 2007, pursuant  to  the previous guidance  of  revenue  arrangements with
multiple deliverables, for a sales arrangement with multiple elements, HP allocated revenue  to  each
element based on  its relative fair value, or for software,  based on VSOE  of fair value.  In the  absence
of fair value for a delivered element, HP  first allocated  revenue to the fair  value of  the undelivered
elements and the residual revenue to the delivered  elements.  Where the fair value for an undelivered
element could not be determined, HP deferred revenue for the delivered elements until the
undelivered elements were delivered or  the fair  value was determinable  for the remaining undelivered
elements. If the revenue for a delivered item  was  not  recognized because it  was not separable from the
undelivered item, then HP also deferred the cost  of  the delivered item. HP limited the amount of
revenue recognition for delivered elements to the amount that was not contingent on the future
delivery of products or services, future performance obligations or  subject to customer-specified return
or refund privileges. For the purposes of income statement classification of products and services
revenue, when HP could not determine fair value for all  of  the elements  in an arrangement  and the
transaction was accounted for as a single unit of  accounting, HP allocated revenue to products  and
services based on a rational and consistent methodology. This methodology utilized external and
internal pricing inputs to derive HP’s  best estimate  of  fair value for the elements in the  arrangement.

In instances when revenue is derived from sales of third-party  vendor services,  revenue is  recorded

at gross when HP is a principal to the  transaction and net  of  costs  when HP is acting as an  agent

86

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 1:  Summary of Significant Accounting  Policies  (Continued)

between the customer and the vendor.  Several factors  are  considered to determine whether HP  is an
agent or principal, most notably whether  HP is the  primary  obligator  to  the customer,  has established
its own pricing, and has inventory and credit risks.

HP reports revenue net of any required  taxes collected  from customers  and remitted to
government authorities, with the collected taxes recorded  as  current liabilities until remitted to the
relevant government authority.

Products

Hardware

Under HP’s standard terms and conditions of sale, HP transfers title  and risk of loss to the

customer at the time product is delivered  to  the customer and revenue  is recognized accordingly,  unless
customer acceptance is uncertain or  significant obligations remain. HP reduces revenue for  estimated
customer returns, price protection, rebates and  other programs offered under  sales  agreements
established by HP with its distributors  and  resellers. HP records revenue from the  sale of  equipment
under sales-type leases as product revenue at the inception of the lease.  HP accrues the estimated cost
of post-sale obligations, including basic product warranties, based  on historical experience at the time
HP recognizes revenue.

Software

In accordance with the specific guidance  for recognizing software revenue, where  applicable, HP
recognizes revenue from perpetual software licenses  at the inception  of the license term assuming all
revenue recognition criteria have been met. Term-based  software license revenue is  recognized on a
subscription basis over the term of the  license entitlement. HP uses  the  residual method  to  allocate
revenue to software licenses at the inception of the license term when VSOE  of  fair value for  all
undelivered elements exists, such as post-contract support, and all other revenue recognition  criteria
have  been satisfied. Revenue generated from maintenance and unspecified  upgrades  or updates on a
when-and-if-available basis is recognized over  the period such  items are delivered.

Services

HP recognizes revenue from fixed-price support  or maintenance contracts, including extended
warranty contracts and software post-contract  customer support agreements, ratably  over the contract
period  and recognizes the costs associated with these contracts as incurred. For time and material
contracts, HP recognizes revenue and costs as  services are rendered. HP recognizes revenue from fixed-
price consulting arrangements over the  contract period on a proportional performance basis, as
determined by the  relationship of actual labor costs incurred  to  date to the estimated total contract
labor costs, with estimates regularly revised  during the life of  the contract.  HP recognizes revenue on
certain design and build (design, development and/or construction of  software and/or systems)  projects
using  the percentage-of-completion method.  HP uses the cost to cost method  of measurement towards
completion as determined by the percentage of cost incurred to date to the  total  estimated costs of  the
project. HP uses the completed contract method if  reasonable and reliable  cost estimates for  a project
cannot be made.

87

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 1:  Summary of Significant Accounting  Policies  (Continued)

Outsourcing services revenue is generally  recognized  when the service is provided  and the  amount

earned is not contingent upon any future event.  If the service is provided  evenly during the contract
term but service billings are uneven, revenue  is recognized  on  a  straight-line basis over  the contract
term. HP recognizes revenue from operating leases on a straight-line basis as service revenue over  the
rental period.

HP recognizes costs associated with outsourcing  contracts  as  incurred, unless such costs relate  to
the transition phase of the outsourcing  contract, in which case  HP defers and subsequently amortizes
these set-up costs over the contractual  services period. Deferred  contract costs are amortized on a
straight-line basis over the remaining original term unless billing patterns indicate a more accelerated
method is appropriate. Based on actual and projected contract financial performance indicators,  the
recoverability of deferred contract costs associated  with a particular contract  is analyzed on a periodic
basis using the undiscounted estimated cash flows  of  the whole contract  over its  remaining  contract
term. If such undiscounted cash flows are insufficient to recover the long-lived  assets and deferred
contract costs, the deferred contract costs  are  written down  based on a discounted  cash flow model. If  a
cash flow deficiency remains after reducing the balance  of the deferred  contract  costs to zero,  any
remaining long-lived assets related to that contract  are  evaluated for  impairment.

HP recognizes losses on consulting and outsourcing arrangements in the period that the

contractual loss becomes probable and estimable. HP  records amounts invoiced  to  customers  in excess
of revenue recognized as deferred revenue  until the  revenue recognition criteria are met. HP  records
revenue that is earned and recognized in excess of  amounts invoiced on fixed-price  contracts as  trade
receivables.

Financing Income

Sales-type and direct-financing leases produce financing income, which HP  recognizes at  consistent

rates of return over the lease term.

Shipping and Handling

HP includes costs related to shipping and handling in cost of  sales  for all periods presented.

Advertising

HP expenses advertising costs as incurred or when the advertising  is first run.  Such  costs totaled

approximately $0.7 billion in fiscal 2009, $1.0 billion  in fiscal 2008 and  $1.1 billion in fiscal 2007.

Taxes on  Earnings

HP recognizes deferred tax assets and liabilities  for the expected tax consequences  of  temporary

differences between the tax bases of  assets and liabilities  and their reported amounts using enacted tax
rates in effect for the year the differences are expected to reverse. HP  records a valuation allowance to
reduce the deferred tax assets to the amount that is more likely than not to be realized.

Cash and Cash Equivalents

HP classifies investments as cash equivalents if the original maturity of an investment  is three
months or less. Cash and cash equivalents consist primarily of  highly liquid investments in time deposits

88

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 1:  Summary of Significant Accounting  Policies  (Continued)

held in major banks and commercial  paper. As of October  31, 2009 and  2008, the carrying value of
cash and cash equivalents approximates  fair value due to the short period of time to maturity. Interest
income was approximately $119 million in  fiscal 2009, $401 million in fiscal 2008 and  $598 million in
fiscal 2007.

Allowance for Doubtful Accounts

HP establishes an allowance for doubtful accounts to ensure trade and financing  receivables are
not overstated due to uncollectability.  HP maintains bad  debt reserves based on a  variety of  factors,
including the length of time receivables  are  past due, trends in  overall weighted-average risk rating of
the total portfolio, macroeconomic conditions, significant one-time events, historical experience and the
use of third-party credit risk models that  generate quantitative measures of default probabilities based
on market factors and the financial condition  of customers. HP  records a specific reserve  for individual
accounts when HP becomes aware of  specific customer circumstances such as  in the case of  bankruptcy
filings or deterioration in the customer’s operating results  or financial position. If  circumstances related
to customers change, HP would further adjust  estimates of the recoverability of receivables.

Inventory

HP values inventory at the lower of cost or market, with  cost computed on a first-in, first-out basis.

Adjustments to reduce the cost of inventory  to  its  net realizable value are made, if  required, for
estimated excess, obsolescence or impaired  balances.

Property, Plant and Equipment

HP states property, plant and equipment at cost less accumulated depreciation.  HP capitalizes

additions and improvements and expenses maintenance and repairs as incurred. Depreciation is
computed using straight-line or accelerated  methods  over the estimated useful lives of the assets.
Estimated useful lives are 5 to 40 years  for buildings and improvements and 3 to 15 years for
machinery and equipment. HP depreciates  leasehold improvements over  the life of  the lease or the
asset, whichever is shorter. HP depreciates equipment held for lease  over  the initial term of the lease
to the equipment’s estimated residual value.  The estimated useful lives of assets used  solely to support
a customer services contract generally do  not  exceed  the term of  the  customer contract.

HP capitalizes certain internal and external costs incurred to  acquire or create internal use

software, principally related to software coding, designing  system interfaces and installation and testing
of the software. HP amortizes capitalized  internal  use software costs using  the straight-line method over
the estimated useful lives of the software, generally from three to five years.

Goodwill and Purchased Intangible Assets

Goodwill and purchased intangible assets with indefinite useful lives  are not amortized  but are

tested for impairment at least annually.  HP reviews goodwill and purchased intangible assets with
indefinite lives for impairment annually at the beginning of its fourth fiscal quarter and whenever
events or changes in circumstances indicate the  carrying  value of an  asset may not be recoverable. For
goodwill, HP performs a two-step impairment test.  In the  first step, HP compares  the fair value of each
reporting unit to its carrying value. Our reporting units are consistent with the reportable  segments
identified in Note 19. HP determines  the fair  value of its reporting  units based  on a  weighting  of

89

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 1:  Summary of Significant Accounting  Policies  (Continued)

income and market approaches. Under the income  approach, HP  calculates the fair value of a
reporting unit based on the present value of estimated future  cash flows. Under the market approach,
HP estimates the fair value based on  market  multiples of revenue or  earnings for comparable
companies. If the fair value of the reporting unit exceeds the  carrying value of the net  assets assigned
to that unit, goodwill is not impaired and no further testing is  performed. If the carrying value  of  the
net assets assigned to the reporting unit exceeds  the fair  value  of  the reporting unit, then  HP must
perform the second step of the impairment test in order  to determine the  implied fair value of the
reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill  exceeds  its implied  fair
value, HP records an impairment loss equal  to  the difference.

The fair value of the indefinite-lived  purchased  intangible assets  is estimated and compared to the

carrying value. HP estimates the fair value  of these intangible assets using  an income approach. HP
recognizes an impairment loss when the estimated fair value of the indefinite-lived purchased  intangible
assets is less than the carrying value.

HP amortizes purchased intangible assets with finite lives  using the  straight-line method over the

estimated economic lives of the assets,  ranging  from  one  to ten years.

Long-Lived Asset Impairment

HP evaluates property, plant and equipment and purchased intangible assets with finite lives  for
impairment whenever events or changes in  circumstances indicate the  carrying value of an asset  may
not be recoverable. HP assesses the recoverability  of  the assets based on the undiscounted future cash
flow the assets are expected to generate  and  recognizes an  impairment loss  when estimated
undiscounted future cash flow expected to result from the use  of  the asset plus  net proceeds  expected
from disposition of the asset, if any,  are  less than  the carrying value of the asset.  When HP identifies
an impairment, HP reduces the carrying amount of the asset to its  estimated  fair value  based on a
discounted cash flow approach or, when  available and appropriate, to comparable market values.

Software Development Costs

Costs incurred to acquire or develop software for  resale may be capitalized subsequent  to  the
software product establishing technological feasibility.  Capitalized software development costs are
amortized using the greater of the straight-line  amortization method  or the ratio that current gross
revenues for a product bear to the total current and anticipated future gross revenues  for that product.
The estimated useful lives for capitalized  software for resale  are  generally  three years or less. Software
development costs incurred subsequent to a product establishing  technological feasibility are usually not
significant. In those instances, such costs are expensed as  incurred.

Fair Value of Financial Instruments

HP measures certain financial assets and liabilities at fair value based on the exchange price that

would be received for an asset or paid to transfer a liability (an exit price) in the principal  or most
advantageous market for the asset or liability in an  orderly transaction between market participants.
Financial instruments are primarily comprised  of time deposits, money market funds, commercial
paper, corporate and other debt securities,  equity securities and other investments in common stock
and  common stock equivalents and derivatives. See Note 9 for a further discussion  on fair  value of
financial instruments.

90

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 1:  Summary of Significant Accounting  Policies  (Continued)

Derivative Financial Instruments

HP uses derivative financial instruments, primarily forwards, swaps, and  options, to hedge certain

foreign currency and interest rate exposures. HP  also  may use other derivative instruments  not
designated as hedges such as forwards used to hedge foreign  currency balance  sheet  exposures. HP
does not use derivative financial instruments for  speculative purposes.  See Note 10 for a full
description of HP’s derivative financial  instrument  activities and related accounting policies, which is
incorporated herein by reference.

Investments

HP’s investments consist principally of  time  deposits,  money market funds, commercial paper,

corporate debt, other debt securities, and equity  securities of publicly-traded and privately-held
companies.

HP classifies its investments in debt securities and its equity investments in  public companies as
available-for-sale securities and carries them  at  fair value. HP determines fair values for investments in
public companies using quoted market  prices and records a charge to Interest  and other,  net when the
change  in fair values is determined to  be  an other-than-temporary  change. HP carries equity
investments in privately-held companies  at  cost or at fair  value when HP recognizes  an
other-than-temporary impairment charge.

HP monitors its investment portfolio for  impairment on a periodic basis. In the  event that the
carrying value of an investment in debt  securities exceeds its fair value  and  the decline in value is
determined to be an other-than-temporary decline  and  1) HP does not intend to sell  the debt security,
and  2) when it is not more likely than not that HP will be required to sell the debt security prior to
recovery  of its amortized cost basis, HP records an impairment charge to Interest and other, net  in the
amount of the credit loss and the balance,  if any, to other comprehensive income.

HP determined the declines in value of certain investments  to  be  other-than-temporary  declines.

Accordingly, HP recorded impairments of  approximately $24 million in fiscal  2009, $27 million in  fiscal
2008 and $28 million in fiscal 2007. HP includes  these  impairments in Interest  and other, net  in the
Consolidated Statements of Earnings.  Depending  on market and other  conditions, HP  may record
additional impairments on its investment portfolio  in the  future.

Concentrations of Credit Risk

Financial instruments that potentially subject  HP to significant concentrations of  credit risk consist

principally of cash and cash equivalents, investments, accounts receivable from  trade customers and
from contract manufacturers, financing  receivables  and  derivatives.

HP maintains cash and cash equivalents, short  and long-term investments, derivatives and certain

other  financial instruments with various financial institutions.  These financial institutions are located in
many different geographical regions and HP’s policy is designed to limit  exposure with any  one
institution. As part of its cash and risk  management processes,  HP performs periodic  evaluations of the
relative credit standing of the financial  institutions. HP has not sustained  material credit  losses from
instruments held at financial institutions. HP  utilizes forward  contracts and other derivative contracts to
protect against the effects of foreign currency  fluctuations. Such contracts involve the risk of
non-performance by the counterparty, which  could result in a  material loss.

91

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 1:  Summary of Significant Accounting  Policies  (Continued)

HP sells a significant portion of its products  through third-party distributors and resellers and,  as a
result, maintains individually significant receivable  balances with these parties. If the  financial condition
or operations of these distributors and resellers  deteriorate substantially,  HP’s operating results could
be adversely affected. The ten largest  distributor  and  reseller  receivable balances collectively, which
were concentrated  primarily in North America and  Europe, represented approximately 22% of gross
accounts receivable at October 31, 2009  and 18% at October 31,  2008. No  single customer accounts  for
more than 10% of accounts receivable. Credit risk with  respect to other accounts receivable and
financing receivables is generally diversified due to the large  number of entities comprising  HP’s
customer base and their dispersion across many  different industries and geographical regions. HP
performs ongoing credit evaluations of  the financial  condition  of  its  third-party distributors, resellers
and  other customers and requires collateral, such as letters of  credit and  bank guarantees,  in certain
circumstances. To ensure a receivable  balance  is not  overstated due to uncollectibility,  an allowance  for
doubtful  accounts is maintained as required under U.S. GAAP. The past due or  delinquency status of a
receivable is based on the contractual  payment terms  of  the receivable.  The need to write  off a
receivable balance depends on the age, size and a  determination of  collectability of the  receivable. HP
generally  has experienced longer accounts receivable collection cycles in  its  emerging markets, in
particular Asia Pacific and Latin America, compared to its United States  and European markets. In the
event that accounts receivable collection cycles in emerging markets significantly deteriorate or  one or
more of HP’s larger resellers or enterprise customers  fail, HP’s operating results  could  be  adversely
affected.

Other Concentration

HP obtains a significant number of components from  single  source suppliers  due  to  technology,
availability, price, quality or other considerations. The loss of a single source  supplier, the deterioration
of its relationship with a single source supplier, or any  unilateral modification to the contractual terms
under which HP is supplied components by a single  source  supplier  could  adversely affect HP’s  revenue
and  gross margins.

Stock-Based Compensation

Stock-based compensation expense for all  share-based payment awards  granted is determined

based on  the grant-date fair value. HP recognizes  these compensation costs net of an  estimated
forfeiture rate, and recognizes compensation cost only for those shares  expected to vest on  a
straight-line basis over the requisite service  period  of the  award,  which is  generally the  vesting  term of
the share-based payment awards. HP estimated the forfeiture  rate  based on  its  historical experience for
fiscal grant years where the majority of  the vesting  terms have been  satisfied.

Foreign Currency Transactions

HP uses the U.S. dollar predominately as  its  functional currency. Assets  and liabilities
denominated in non-U.S. dollars are  remeasured into U.S. dollars at  current exchange rates for
monetary assets and liabilities, and historical  exchange rates for  nonmonetary  assets and liabilities. Net
revenue, cost of sales and expenses are remeasured at average exchange  rates  in effect during each new
reporting period, and net revenue, cost of sales and expenses related to the previously reported periods
are remeasured at historical exchange rates.  HP includes gains  or  losses  from foreign currency
remeasurement in net earnings. Certain foreign subsidiaries designate  the  local currency as  their

92

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 1:  Summary of Significant Accounting  Policies  (Continued)

functional currency, and HP records  the translation  of their  assets and liabilities into U.S. dollars at the
balance sheet dates as translation adjustments and includes  them  as a component of accumulated other
comprehensive loss.

Retirement and Post-Retirement Plans

HP has various defined benefit, other contributory  and noncontributory retirement and

post-retirement plans. In addition, HP has assumed additional  retirement and  post-retirement plans  in
connection with its acquisition of Electronic Data Systems Corporation (‘‘EDS’’)  in August 2008. HP
generally  amortizes unrecognized actuarial  gains and losses on a straight-line  basis over  the remaining
estimated service life of participants.  The measurement date for all  HP plans  is October  31 for fiscal
2009 and September 30 for fiscal 2008  except  that the measurement  date for EDS plans is October 31
for fiscal 2008. See Note 16 for a full description of these plans and the accounting and funding
policies, which is incorporated herein by  reference.

Loss Contingencies

HP is involved in various lawsuits, claims, investigations and proceedings  that arise  in the ordinary

course of business. HP records a provision for a liability when it believes  it is both probable that a
liability  has been incurred and the amount can be reasonably estimated. Significant judgment is
required to determine both probability and the estimated amount. HP reviews these provisions  at least
quarterly and adjusts these provisions to reflect  the impact of negotiations, settlements, rulings, advice
of legal counsel, and updated information.  Litigation is inherently unpredictable and is subject  to
significant uncertainties, some of which are beyond  HP’s  control.

HP evaluated all subsequent events that occurred after  the balance sheet date and through the

date and time its financial statements were issued  on December 17, 2009.

Accounting Pronouncements

In September 2006, the FASB issued a new accounting standard related  to fair value

measurements. The new standard defines fair value,  establishes a framework for measuring  fair value,
and  expands disclosures about fair value measurements. In February 2008,  the FASB issued a new
provision which delayed the effective  date of the fair value measurements and disclosures for all
nonfinancial assets and nonfinancial liabilities,  except those that are recognized or  disclosed at fair
value in the financial statements on a recurring  basis (at least annually). In August 2009, the FASB
issued  Accounting Standards Update (‘‘ASU’’) No. 2009-05, ‘‘Measuring Liabilities  at Fair Value’’ in
relation to the fair value measurement of liabilities. HP  adopted the  applicable portions of the
provisions of the new standards in the  first and  fourth quarters of fiscal 2009, and will adopt the
provision related to the nonfinancial  assets and nonfinancial  liabilities in the first quarter of fiscal 2010.
Although HP will continue to evaluate the application of the  provision for the nonfinancial assets and
nonfinancial liabilities, HP does not expect the  adoption to have  a material impact on  its  consolidated
financial statements. See Note 9 for  additional information pertaining to fair value  measurements.

In December 2007, the FASB issued  a new  accounting standard  related to business combinations.

The new standard expands the definition of a business and a business combination; requires recognition
of assets acquired, liabilities assumed, and contingent  consideration at their  fair value  on the  acquisition
date with subsequent changes recognized in earnings; requires acquisition-related expenses  and

93

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 1:  Summary of Significant Accounting  Policies  (Continued)

restructuring costs to be recognized separately  from the business combination and expensed as
incurred; requires in-process research and development to be capitalized at fair value  as an indefinite-
lived  intangible asset; and requires that  changes in accounting  for  deferred tax asset valuation
allowances and acquired income tax uncertainties after the  measurement period be recognized  as a
component of provision for taxes. The new  standard also establishes disclosure requirements  to  enable
the evaluation of the nature and financial effects of the business combination. In April 2009,  the FASB
issued  a new standard which clarified the accounting for pre-acquisition contingencies. HP will adopt
these new business combination standards in the first quarter of  fiscal  2010. The impact of  adoption
will be largely dependent on the size and nature  of the  business combinations completed after the
adoption of this statement.

In December 2007, the FASB issued  a new  accounting standard  related to noncontrolling  interests.
The new standard establishes accounting and reporting standards  for ownership interests in subsidiaries
held by parties other than the parent, the amount of consolidated net income attributable  to  the parent
and  to the noncontrolling interest, changes in a parent’s  ownership interest,  and the  valuation of
retained noncontrolling equity investments  when  a  subsidiary is  deconsolidated.  The new standard  also
establishes disclosure requirements that clearly  identify and distinguish between the  interests  of the
parent and the interests of the noncontrolling owners. HP will adopt this  new accounting  standard in
the first quarter of fiscal 2010. HP does not expect the adoption of this standard will have a  material
effect on its consolidated financial statements.

In May 2008, the FASB issued a new accounting standard  related  to  convertible debt instruments.

The new standard requires the issuer of certain  convertible debt instruments that may be settled in cash
(or other assets) on conversion to separately account for the  liability  (debt)  and equity (conversion
option) components of the instrument in a manner that reflects  the issuer’s non-convertible  debt
borrowing rate. HP will adopt this new accounting  standard on  a  retrospective basis in the  first  quarter
of fiscal 2010. HP does not expect the  adoption of this standard will  have a  material  effect  on its
consolidated financial statements.

In June 2008, the FASB issued a new  accounting standard that  clarifies whether instruments
granted in share-based payment transactions should be included in computing earnings  per  share.
Under the new standard, HP will be  required to include  restricted  stock that  contains non-forfeitable
rights to dividends in its calculation of basic earnings  per  share  (‘‘EPS’’),  and will need to calculate
basic  EPS using the ‘‘two-class method.’’ The two-class method of computing EPS is an  earnings
allocation formula that determines EPS  for each class  of  common stock and participating securities
according to dividends declared (or accumulated) and participation  rights in  undistributed earnings. HP
will adopt this new accounting standard on  a  retrospective basis in the first  quarter  of  fiscal 2010. HP
does not expect the adoption of this standard will have a material effect on  its  calculation of  basic EPS.

In November 2008, the FASB issued a new accounting standard related to defensive  intangible

assets. Defensive intangible assets are acquired intangible assets that the acquirer does not intend to
actively use but intends to hold to prevent its competitors from  obtaining access  to  them. Under the
new standard, defensive intangible assets must  be  initially recognized at fair value and amortized  over
the benefit period. HP will adopt this new accounting standard in  the first quarter of fiscal 2010.  The
impact  of adoption will be largely dependent on  the size  and nature of business combinations
completed after the date of adoption.

94

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 1:  Summary of Significant Accounting  Policies  (Continued)

In December 2008, the FASB issued  a new  accounting standard  that requires additional  disclosures
about assets held in an employer’s defined benefit pension or other  postretirement plan. HP will adopt
this new accounting standard in the first quarter  of fiscal 2010. HP  will present the required disclosures
in the  prescribed format on a prospective basis upon adoption. This  new  standard will  only  affect the
notes to  HP’s consolidated financial statements.

In June 2009, the FASB issued a new  accounting standard related to transfers of financial assets. It

amends previous guidance to remove the concept  of  a  qualifying special-purpose entity and its
exemption from consolidation in the  transferor’s financial statements.  This new standard also
establishes conditions for reporting a transfer  of  a  portion of a financial asset  as a sale, modifies  the
financial-asset derecognition criteria, revises how interests retained by the transferor in  a sale  of
financial assets are initially measured,  removes the  guaranteed mortgage  securitization
recharacterization  provisions, and requires additional disclosures. HP will adopt this new accounting
standard in the first quarter of fiscal 2011. HP  does not  expect  the  adoption of this standard will have a
material effect on its consolidated financial statements.

In June 2009, the FASB issued a new  accounting standard related to the consolidation of variable

interest entities. It eliminates the quantitative approach previously  required  for determining the primary
beneficiary of a variable interest entity  and requires ongoing  qualitative reassessments of whether an
enterprise is the primary beneficiary of a variable interest entity. This new standard also  requires
additional disclosures about an enterprise’s involvement in  variable  interest  entities. HP will adopt this
new accounting standard in the first quarter of fiscal 2011. HP is currently  evaluating  the impact the
adoption of this standard will have on its consolidated financial statements.

During the fourth quarter of fiscal 2009,  HP adopted the  FASB Accounting Standards  Codification

and  the Hierarchy of Generally Accepted Accounting Principles which only affected the  specific
references to GAAP literature in the notes  to  HP’s  consolidated  financial  statements.

In October 2009, the FASB issued ASU 2009-13.  The new standard changes  the requirements  for

establishing separate units of accounting in  a  multiple  element  arrangement and  requires the allocation
of arrangement consideration to each deliverable  to  be  based on the  relative selling price. Concurrently
to issuing ASU 2009-13, the FASB also issued ASU 2009-14. ASU 2009-14 excludes software  that  is
contained on a tangible product from  the scope of  software revenue guidance if the software  is
essential to the tangible product’s functionality.

A further discussion of the financial impact of  ASU 2009-13 and ASU 2009-14 appears  under

‘‘Revenue Recognition’’ above.

Note 2:  Stock-Based Compensation

HP’s stock-based compensation plans  include incentive  compensation  plans and an employee stock

purchase plan (‘‘ESPP’’).

Stock-based Compensation Expense and  the Related Income Tax Benefits

Total stock-based compensation expense before income taxes for  fiscal 2009, 2008 and  2007 was
$635 million, $606 million and $629 million, respectively. The resulting income tax benefit  for fiscal
2009, 2008 and 2007 was $199 million, $178 million  and  $182 million, respectively.

95

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 2:  Stock-Based Compensation (Continued)

Cash received from option exercises  and  purchases under the  ESPP in fiscal 2009 was $1.8 billion.
The actual tax benefit realized for the  tax deduction  from option  exercises of the share-based  payment
awards in fiscal 2009 totaled $252 million. Cash received from option exercises and purchases under  the
ESPP in fiscal 2008 was $1.8 billion. The actual tax benefit  realized for  the tax  deduction from option
exercises of the share-based payment  awards in fiscal  2008 totaled $412  million.

Incentive Compensation Plans

HP’s incentive compensation plans include principal option  plans adopted in 2004, 2000, 1995  and

1990 (‘‘principal option plans’’), as well as various stock option plans assumed  through acquisitions
under which stock-based awards are outstanding. Stock-based awards granted from the principal  option
plans include performance-based restricted units (‘‘PRUs’’), stock  options and restricted  stock  awards.
Employees meeting certain employment qualifications were eligible to receive  stock-based  awards in
fiscal 2009. There were approximately 91,000  employees holding stock-based awards under  one or more
of the option plans as of October 31, 2009.

In fiscal 2008, HP implemented a program  that provides for the issuance of PRUs representing
hypothetical shares of HP common stock that may be issued under the  Hewlett-Packard  Company 2004
Stock Incentive Plan. PRU awards may be granted to eligible  employees, including  HP’s  principal
executive officer, principal financial officer and other executive officers.  Each PRU award reflects  a
target number of shares that may be  issued to the award recipient.  The  actual number of shares  the
recipient receives is determined at the  end  of  a  three-year performance  period based on results
achieved versus company performance goals. Those goals are based  on HP’s annual cash flow  from
operations as a percentage of revenue and average total shareholder  return (‘‘TSR’’) relative to the
S&P 500 over the performance period.  Depending  on HP’s results  during  the three-year  performance
period, the actual number of shares that a grant recipient  receives at the end  of  the period  may range
from 0% to 200% of the targeted shares  granted, based on the  calculations described below.

Cash flow performance goals are established at the beginning of each  year.  At the end of  each

year, a portion of the target number of  shares may be credited in the award recipient’s  name
depending on the achievement of the  cash flow  performance goal  for that year. The number of shares
credited varies between 0% if performance  is below the minimum  level  and 150%  if performance is  at
or above the maximum level. For performance between the minimum  level and the maximum level, a
proportionate percentage between 30% and 150% is applied  based on relative  performance between
the minimum and the maximum levels.

Following the expiration of the three-year performance period, the number  of  shares credited to
the award recipient during the performance period is adjusted by a TSR  modifier. The TSR modifier,
which is determined at the beginning  of  each performance period,  varies between 0%,  if the  minimum
level is not met, resulting in no payout under the PRU  award,  and 133%, if performance is at  or above
the maximum level. For performance between the minimum level and  the maximum  level, a
proportionate TSR modifier between 66%  and  133% is applied based on relative performance between
the minimum and the maximum levels. The  number of shares, if any, received by the PRU award
recipient equals the number of shares credited to the award recipient  during  the performance  period
multiplied by the TSR modifier.

Recipients of PRU awards generally must  remain employed  by HP on  a continuous basis  through
the end of the applicable three-year performance period in order to receive any portion  of  the shares

96

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 2:  Stock-Based Compensation (Continued)

subject  to that award. Target shares subject to PRU awards do not have  dividend  equivalent rights  and
do not have the voting rights of common stock  until earned  and issued  following  the end of the
applicable performance period.

Stock options granted under the principal option  plans are  generally non-qualified stock options,

but the principal option plans permit some options granted to qualify  as ‘‘incentive stock options’’
under the U.S. Internal Revenue Code. Stock options generally  vest over  four years from  the date  of
grant.  The exercise price of a stock option is  equal to the fair market value of  HP’s  common stock on
the option grant date (as determined by  the reported sale prices of HP’s  common stock when the
market closes on that date). The contractual term  of  options granted  since  fiscal 2003 was generally
eight years, while the contractual term of options granted prior to fiscal 2003  was  generally ten years.
Under the principal option plans, HP may  choose, in certain  cases,  to  establish a discounted exercise
price at no less than 75% of fair market value  on  the grant date. HP  has not granted any discounted
options since fiscal 2003.

Under the principal option plans, HP granted certain employees cash-settled  awards,  restricted
stock awards, or both. Restricted stock awards are non-vested stock  awards that may include  grants of
restricted stock or grants of restricted stock  units. Cash-settled awards and restricted stock  awards  are
independent of option grants and are generally subject  to  forfeiture if  employment terminates  prior to
the release of the  restrictions. Such awards  generally vest one to three  years from  the date of  grant.
During that period, ownership of the shares cannot be transferred.  Restricted stock  has the same  cash
dividend and voting rights as other common  stock and is considered to be currently issued and
outstanding. Restricted stock units have  dividend  equivalent rights equal to the cash dividend paid on
restricted stock. Restricted stock units do not have  the voting  rights of common  stock,  and the  shares
underlying the restricted stock units are  not considered  issued and outstanding. HP expenses  the fair
market value of restricted stock awards, as determined on the date of grant, ratably  over the period
during which the restrictions lapse.

Performance-based Restricted Units

HP estimated the fair value of a target PRU share  using the  Monte Carlo simulation model, as the

TSR modifier contains a market condition. The  following  weighted-average assumptions were  used to
determine the weighted-average fair values  of  the PRU awards for  fiscal years ended October 31:

Weighted-average fair value of grants  per  share . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life in months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2009

2008

35%

$40.56(1) $40.21(2)
26%
1.34% 3.13%
0.88% 0.70%

30

33

(1) Reflects the weighted-average fair value for  the  second year  of the three-year  performance period
applicable to PRUs granted in fiscal  2008 and for  the first  year of the three-year performance
period applicable to PRUs granted in  fiscal  2009. The estimated fair value of a target  share for the
third year for PRUs granted in fiscal 2008 and for  the second  and third years for PRUs granted in

97

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 2:  Stock-Based Compensation (Continued)

fiscal 2009 will be determined when the annual cash flow goals are approved, and the expense will
be amortized over the remainder of the applicable three-year  performance period.

(2) Reflects the weighted-average fair value for  the  first year  of the three-year  performance period

applicable to PRUs granted in fiscal  2008.

(3) HP uses historic volatility for PRU awards as  implied volatility  cannot be used when simulating

multivariate prices for companies in the S&P  500.

Outstanding PRUs as of October 31,  2009  and 2008  and changes during fiscal  2009 and 2008 were

as follows:

Outstanding at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in units due to performance  and market conditions . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Outstanding at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PRUs assigned a fair value at end of  year . . . . . . . . . . . . . . . . . . . . . . . . . .

2009

2008

Shares in thousands

10,965
13,966
—
1,193
(1,401)

24,723

13,426

—
8,783
—
2,492
(310)

10,965

5,292

At October 31, 2009, there was $193 million of unrecognized  pre-tax stock-based compensation
expense related to PRUs with an assigned fair value, which HP  expects to  recognize over the remaining
weighted-average vesting period of 1.5 years. At October  31, 2008, there was $108 million of
unrecognized pre-tax stock-based compensation expense  related to PRUs  with an assigned fair value,
which  HP expected to recognize over  the remaining weighted-average vesting period of 2.0 years.

Stock Options

HP utilized the Black-Scholes option  pricing model to value the stock options granted under its

principal option plans. HP examined its historical pattern  of option exercises in an effort  to  determine
if there were any discernable activity patterns based on  certain employee populations. From  this
analysis, HP identified three employee populations  on which to apply the  Black-Scholes model. The
table below presents the weighted-average  expected life  in months of the combined  three identified
employee populations. The expected life  computation is based on  historical  exercise  patterns and
post-vesting termination behavior within each  of the three populations identified. The  risk-free interest
rate for periods within the contractual  life  of  the award is  based on the U.S. Treasury yield curve in
effect at the time of grant.

98

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 2:  Stock-Based Compensation (Continued)

The weighted-average fair value of stock options was estimated using the  Black-Scholes option

pricing model with the following weighted-average assumptions:

Weighted-average fair value of grants  per  share . . . . . . . . . . . . . . . . . . . . .
Implied volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life in months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Stock Options(1)
2008

2007

2009

$13.04

$15.26

$13.01

43%

28%
34%
2.07% 3.09% 4.68%
0.92% 0.69% 0.75%
60

59

61

(1) The fair value calculation was based on stock options  granted during the period.

Option activity as of October 31 during each fiscal year was as follows:

Outstanding at beginning of year . .
Granted and assumed through

acquisitions

. . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . .
Forfeited/cancelled/expired . . . . . .

Shares

In thousands
307,728

2,190
(55,784)
(20,920)

Outstanding at end of year

. . . . .

233,214

Vested and expected to vest at end
. . . . . . . . . . . . . . . .

of year

231,134

Exercisable at end of year . . . . . .

207,757

2009

Weighted- Weighted-
Average
Average
Remaining
Exercise
Contractual
Price
Term
Per Share

Aggregate
Intrinsic
Value

Shares

2008

Weighted- Weighted-
Average
Average
Remaining
Exercise
Contractual
Price
Term
Per Share

Aggregate
Intrinsic
Value

In years

In millions In thousands

In years

In millions

$34

$29
$28
$57

$33

$33

$32

367,339

10,849
(54,949)
(15,511)

2.6

2.6

2.2

$3,643

307,728

$3,623

$3,399

304,198

252,049

$33

$49
$26
$45

$34

$34

$34

3.4

3.3

2.8

$2,752

$2,731

$2,423

In fiscal  2008, approximately 8 million stock options with  a  weighted-average  exercise price of $50

per  share were assumed through the acquisition of EDS.

The aggregate intrinsic value in the table  above represents the total pre-tax intrinsic value that
option holders would have received had  all option holders exercised  their options on October  31, 2009
and 2008. The aggregate intrinsic value is the  difference between HP’s closing  stock  price on  the last
trading day of fiscal 2009 and fiscal 2008  and  the exercise price, multiplied by the  number of
in-the-money options. Total intrinsic value  of options exercised in fiscal  2009, 2008 and 2007 was
$0.8 billion, $1.1 billion and $2.0 billion, respectively. Total fair value of  options  vested and expensed in
fiscal 2009, 2008 and 2007 was $172  million, $264 million and $297 million, respectively, net of taxes.

99

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 2:  Stock-Based Compensation (Continued)

Information about options outstanding at October  31, 2009 was as follows:

Range of Exercise Prices

$0-$9.99 . . . . . . . . . . . . . . . . . . . . . . . . . .
$10-$19.99 . . . . . . . . . . . . . . . . . . . . . . . .
$20-$29.99 . . . . . . . . . . . . . . . . . . . . . . . .
$30-$39.99 . . . . . . . . . . . . . . . . . . . . . . . .
$40-$49.99 . . . . . . . . . . . . . . . . . . . . . . . .
$50-$59.99 . . . . . . . . . . . . . . . . . . . . . . . .
$60 and over . . . . . . . . . . . . . . . . . . . . . . .

Options Outstanding

Options Exercisable

Weighted-
Average
Remaining
Contractual
Life

Weighted-
Average
Exercise
Price
Per Share

In years
6.9
1.8
2.7
3.3
2.8
0.9
1.2

2.6

$ 6
$16
$23
$33
$45
$57
$69

$33

Weighted-
Average
Exercise
Price
Per Share

$ 5
$16
$23
$33
$45
$57
$69

$32

Shares
Exercisable

In thousands

172
24,117
76,685
42,853
43,307
15,520
5,103

207,757

Shares
Outstanding

In thousands

415
24,129
77,523
53,094
56,997
15,953
5,103

233,214

At October 31, 2009, there was $188 million of unrecognized  pre-tax stock-based compensation

expense related to stock options, which  HP expects  to  recognize over the  remaining  weighted-average
vesting period of 1.1 years. As of October 31,  2008, there was $425 million of unrecognized  pre-tax
stock-based compensation expense related to stock options,  which HP  expected  to  recognize over a
weighted-average of 1.6 years.

Restricted Stock Awards

Non-vested restricted stock awards as  of October 31, 2009  and 2008 and changes  during  fiscal 2009

and 2008 were as follows:

Outstanding at beginning of year . . . . . . . . . .
Granted and assumed through acquisitions . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . .

Shares

In thousands
12,930
836
(5,631)
(1,271)

Outstanding at end of year . . . . . . . . . . . . . .

6,864

2009

2008

Weighted-
Average Grant
Date Fair Value
Per Share

$44
$36
$44
$43

$44

Weighted-
Average Grant
Date Fair Value
Per  Share

$29
$45
$32
$28

$44

Shares

In thousands
5,698
12,712
(4,010)
(1,470)

12,930

100

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 2:  Stock-Based Compensation (Continued)

The details of restricted stock awards granted and assumed through acquisitions were as follows:

2009

2008

2007

Weighted-
Average Grant
Date Fair
Value
Per Share

$36

$35

$36

Weighted-
Average Grant
Date Fair
Value
Per Share

$46

$45

$45

Shares

In thousands
1,393

11,319

12,712

Weighted-
Average Grant
Date Fair
Value
Per Share

$43

$45

$44

Shares

In thousands
1,469

151

1,620

Shares

In thousands
493

343

836

Restricted stock . .
Restricted stock

units . . . . . . . . .

In fiscal  2008, approximately 11 million restricted stock  units with  a  weighted-average  grant date

fair value of $45 per share were assumed through the acquisition of EDS.

The details of non-vested restricted stock awards at fiscal year end  were as  follows:

2009

2008

2007

Shares in thousands

Non-vested at October 31:

Restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,771
5,093

2,835
10,095

4,763
935

6,864

12,930

5,698

As of October 31, 2009, there was $117 million  of unrecognized  pre-tax  stock-based  compensation
expense related to non-vested restricted  stock awards, which HP expects to recognize  over a weighted-
average vesting period of 1.6 years. As of  October  31, 2008, there was $263  million of  unrecognized
pre-tax stock-based compensation expense related to non-vested  restricted stock awards,  which HP
expected to recognize over a weighted-average vesting period of 1.2 years.

Employee Stock Purchase Plan

HP sponsors the Hewlett-Packard Company 2000  Employee  Stock  Purchase Plan, also  known  as
the Share Ownership Plan (the ‘‘ESPP’’), pursuant  to  which eligible employees may contribute up to
10% of base compensation, subject to  certain income limits, to purchase shares  of HP’s common stock.
For purchases made on or before April 30, 2009,  employees purchased stock  pursuant  to  the ESPP
semi-annually at a price equal to 85%  of the  fair market value on the purchase date,  and HP
recognized expense based on a 15%  discount of the  fair market value for those  purchases.  Effective
May 1, 2009,  HP modified the ESPP  to  eliminate the  15%  discount applicable to purchases made
under the ESPP.

101

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 2:  Stock-Based Compensation (Continued)

The ESPP activity as of October 31 during each  fiscal year was as  follows:

Compensation expense, net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average purchase price per share . . . . . . . . . . . . . . . . . . . . . . . . . . .

Employees eligible to participate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employees who participated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2009

2008

2007

In millions, except
weighted-average
purchase price per share
$ 56
$ 58
$ 24
8.74
9.68
6.16
$ 39
$ 36
$ 33

2009

2008

2007

In thousands
164
50

260
49

161
51

Shares Reserved

Shares available for future grant and shares reserved for future issuance under  the ESPP and

incentive compensation plans were as follows:

Shares available for future grant at October 31:

HP plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumed Compaq and EDS plans . . . . . . . . . . . . . . . . . . . . . . . . . . .

2009

2008

2007

Shares in thousands

95,311(1) 117,655
82,449(2) 73,147
190,802
177,760

136,392
45,312

181,704

Shares reserved for future issuance under  all stock-related benefit  plans

at October 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

410,977

498,574

549,045

(1)

(2)

Includes  24,267,000 shares that expired  in November 2009.

In November 2009, HP retired the assumed  Compaq and  EDS plans for purposes of granting  new
awards. The shares that had been reserved  for future awards under those plans were returned to
HP’s pool of authorized shares and will not be available for issuance under any other HP plans.

HP had 21,494,000 shares of common stock reserved at October 31, 2007 for  future issuances
related to conversion of its zero-coupon subordinated  notes, which were  redeemed in March 2008.

Note 3: Net Earnings Per Share

HP calculates basic earnings per share using net  earnings  and the weighted-average number of
shares outstanding during the reporting  period.  Diluted EPS includes  any dilutive effect of outstanding
stock options, PRUs, restricted stock units, restricted stock and convertible  debt.

102

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 3:  Net Earnings Per Share (Continued)

The reconciliation of the numerators and denominators  of  the basic and diluted EPS calculations

was as follows for the following fiscal years ended October  31:

2009

2008

2007

In millions, except per share
amounts

Numerator:

Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment for interest expense on zero-coupon subordinated convertible

$7,660

$8,329

$7,264

notes, net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

3

7

Net earnings, adjusted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$7,660

$8,332

$7,271

Denominator:

Weighted-average shares used to compute basic EPS . . . . . . . . . . . . . . . .
Effect of dilutive securities:

Dilution from employee stock plans . . . . . . . . . . . . . . . . . . . . . . . . . . .
Zero-coupon subordinated convertible notes . . . . . . . . . . . . . . . . . . . .

Dilutive  potential common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,388

2,483

2,630

49
—

49

81
3

84

78
8

86

Weighted-average shares used to compute diluted EPS . . . . . . . . . . . . . . .

2,437

2,567

2,716

Net earnings per share:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 3.21

$ 3.35

$ 2.76

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 3.14

$ 3.25

$ 2.68

HP excludes options with exercise prices that are  greater  than the  average market price from  the

calculation of diluted EPS because their effect  would be anti-dilutive. In fiscal 2009, 2008  and 2007, HP
excluded from the calculation of diluted  EPS options to purchase  85 million shares,  54 million shares
and 60 million shares, respectively. HP also excluded from the calculation of diluted  EPS options to
purchase an additional 2 million shares,  28 million  shares and 33 million shares in fiscal 2009, 2008 and
2007, respectively, whose combined exercise price, unamortized fair value and excess tax benefits  were
greater in each of those periods than  the average market price  for  HP’s common stock because  their
effect would be anti-dilutive.

As disclosed in Note 2, during fiscal  2009  and  2008, HP granted PRU awards representing at

target approximately 14 million shares  and 9 million shares, respectively. HP includes  the shares
underlying PRU awards in the calculation  of  diluted EPS when  they  become contingently  issuable and
excludes such shares when they are not contingently issuable. Accordingly, for fiscal 2009, HP has
included 6 million shares underlying  the PRU awards  granted in fiscal 2009 and 2008 when calculating
diluted EPS as those shares became contingently issuable upon  the satisfaction of the  cash flow from
operations condition with respect to the  first year of the  three-year performance period applicable  to
the fiscal 2009 awards and the first and second years of the three-year performance period applicable
to the fiscal 2008 awards. HP has excluded  all other shares underlying  the fiscal 2009 and 2008  PRU
awards when calculating diluted EPS as  those shares are  not  contingently issuable. For fiscal 2008, HP
has included 2 million shares underlying  the PRU awards granted in fiscal 2008 when calculating
diluted EPS as those shares became contingently issuable upon  the satisfaction of the  cash flow from
operations condition with respect to the  first year of the  three-year performance period applicable  to

103

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 3:  Net Earnings Per Share (Continued)

the fiscal 2008 awards. HP has excluded  all other  shares underlying  the fiscal 2008  PRU  awards when
calculating diluted EPS as those shares  were not contingently issuable.

In October and November 1997, HP issued U.S. dollar  zero-coupon  subordinated  convertible notes
due 2017 (the ‘‘LYONs’’), the outstanding principal  amount of  which was  redeemed  in March 2008.  The
LYONs were convertible at the option of the holders at any time prior to maturity, unless  previously
redeemed or otherwise purchased. For purposes of calculating diluted earnings per share  above, the
interest expense (net of tax) associated with  the LYONs  was  added back to  net earnings, and the shares
issuable upon conversion of the LYONs were  included in  the weighted-average shares used to compute
diluted earnings per share for periods that the LYONs were outstanding.

Note 4:  Balance Sheet Details

Balance sheet details were as follows for  the following fiscal years ended October 31:

Accounts and Financing Receivables

2009

2008

In millions

Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$17,166
(629)

$17,481
(553)

$16,537

$16,928

Financing receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,723
(48)

$ 2,355
(41)

$ 2,675

$ 2,314

HP has revolving trade receivables-based facilities  permitting it  to  sell  certain  trade receivables to

third parties on a non-recourse basis.  The  aggregate maximum  capacity under these programs was
$568 million as of October 31, 2009. HP sold $1,667  million  of trade receivables during  fiscal  2009. As
of October 31, 2009, HP had $269 million  available under these programs.

Inventory

Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchased parts and fabricated assemblies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$4,092
2,036

$5,219
2,660

$6,128

$7,879

2009

2008

In millions

104

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 4:  Balance Sheet Details (Continued)

Other Current Assets

Deferred tax assets — short-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Value added taxes receivable from the  government . . . . . . . . . . . . . . . . . . . . . . . .
Supplier and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Property, Plant and Equipment

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings and leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2009

2008

In millions

$ 4,979
2,650
3,439
2,797

$ 3,920
3,115
3,082
4,244

$13,865

$14,361

2009

2008

$

$

In millions
513
7,472
12,959

526
7,238
11,121

Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(9,682)

(8,047)

$11,262

$10,838

Depreciation expense was approximately $3.2 billion in fiscal  2009, $2.4 billion  in fiscal 2008 and

$1.9 billion in fiscal 2007.

20,944

18,885

Long-Term Financing Receivables and Other Assets

Financing receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets — long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 3,303
1,750
6,236

$ 2,722
792
6,954

2009

2008

In millions

Other Accrued Liabilities

$11,289

$10,468

2009

2008

In millions

Other accrued taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and marketing programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,784
1,777
2,724
6,787

$ 3,258
1,973
2,958
7,243

$14,072

$15,432

105

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 4:  Balance Sheet Details (Continued)

Other Liabilities

2009

2008

In millions

Pension, post-retirement, and post-employment liabilities . . . . . . . . . . . . . . . . . . . .
Deferred tax liability — long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 6,427
4,230
3,249
3,393

$ 3,712
3,162
3,152
3,748

$17,299

$13,774

Long-term deferred revenue represents service and product  deferred revenue to be recognized
after one year from the balance sheet date. Deferred revenue  represents amounts received or billed in
advance  for fixed-price support or maintenance contracts, software customer support contracts,
outsourcing services start-up or transition work, consulting and integration  projects,  product sales and
leasing income. The fixed-price support  or maintenance contracts include stand-alone product support
packages, routine maintenance service contracts, upgrades or extensions  to standard product warranty,
as well as high availability services for  complex, global, networked, multi-vendor environments.  HP
defers these service amounts at the time  HP bills the  customer, and HP then  recognizes the amounts
ratably over the contract life or as HP  renders  the services. HP  also  defers and subsequently  amortizes
certain set-up costs related to activities  that enable the  performance of the customer  contract. Deferred
contract costs, including set-up and other unbilled  costs, are amortized  on a straight-line basis over the
remaining original contract term unless billing  patterns  indicate  a  more accelerated method is
appropriate.

Note 5: Supplemental Cash Flow Information

Supplemental cash flow information  to the Consolidated Statements of Cash Flows for the fiscal

years ended October 31 2009, October 31,  2008 and October  31, 2007 was as  follows:

Cash paid for income taxes, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash investing and financing activities:

Issuance of common stock and stock  awards assumed in business  acquisitions .
Purchase of assets  under financing arrangements . . . . . . . . . . . . . . . . . . . . .
Purchase of assets  under capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Note 6: Acquisitions

Acquisitions in fiscal 2009

2009

2008

2007

In millions
$1,136
$ 426

$643
$572

$956
$489

$ — $ 316
$283
$131

$ 41
$ — $ 57
$ —
$

30

In fiscal  2009, HP completed two acquisitions. Total consideration  for the  acquisitions was
$390 million, which includes direct transaction costs and the assumption of certain liabilities in
connection with the transactions. HP  recorded $315 million of goodwill, $105 million  of purchased
intangibles and $7 million of in-process research and development charges (‘‘IPR&D’’) related  to  these
transactions. Projects that qualify for treatment as IPR&D  have not yet reached technical feasibility

106

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 6:  Acquisitions (Continued)

and  have no alternative use. HP does  not  expect goodwill recorded with  these acquisitions  to  be
deductible for tax purposes. HP has not presented pro  forma results of operations because the
acquisitions are not material to HP’s  consolidated financial statements.

The largest of the two acquisitions is  the acquisition of  Lefthand  Networks, Inc., a leading provider

of storage virtualization and solutions, which has been integrated into HP’s Enterprise Storage and
Servers segment. The total purchase price paid was $347  million in cash including direct  transaction
costs and the assumption of certain liabilities in connection with the transaction.  HP recorded
$273 million to goodwill, $95 million  to  purchased  intangibles  and $6 million to IPR&D  charges  related
to this acquisition. HP is amortizing the purchased intangibles on a straight-line basis over a weighted-
average estimated life of 6.3 years.

Pending Acquisition

In November 2009, HP entered into a definitive  agreement to acquire 3Com Corporation
(‘‘3Com’’), a global enterprise provider of  networking switching, routing  and security solutions, at  a
price of $7.90 per share in cash or an enterprise  value of approximately $2.7 billion. The acquisition is
subject  to customary closing conditions, including  the receipt of  domestic and foreign regulatory
approvals and the approval of 3Com’s  stockholders.  The  transaction is expected to close in HP’s second
fiscal quarter of 2010.

Acquisitions in fiscal 2008

Acquisition of Electronic Data Systems Corporation

On August 26, 2008, HP completed its acquisition of EDS, a leading global  technology services
company, delivering a broad portfolio  of  information technology, applications  and business process
outsourcing services to clients in the manufacturing, financial services, healthcare,  communications,
energy, transportation, and consumer and retail industries and to governments  around the world.

The purchase price for EDS was $13.0 billion, comprised of $12.7 billion cash  paid for  outstanding
common stock, $328 million for the fair value of stock options and restricted stock units assumed, and
$36 million for direct transaction costs. Of the  total purchase price, $10.4  billion has  been allocated to
goodwill, $4.6 billion has been allocated to amortizable intangible  assets acquired and  $2.0 billion has
been allocated to net tangible liabilities  assumed in connection with the  acquisition.  HP also  expensed
$30 million for IPR&D charges.

Pro forma results for EDS acquisition

The following table presents the unaudited pro forma results for the year ended  October 31,  2008.

The unaudited pro forma financial information  for the year ended  October 31,  2008 combines the
results of operations of HP and EDS as though the  companies had been combined  as of the beginning
of fiscal 2008. The pro forma financial  information is  presented  for informational purposes only and is
not indicative of the results of operations  that would  have been achieved  if  the acquisition and  related
borrowings had taken place at the beginning of fiscal 2008.  The unaudited pro forma results  presented
include amortization charges for acquired intangible assets, eliminations  of  intercompany transactions,
restructuring charges, IPR&D charges, adjustments for incremental stock-based  compensation expense
related to the unearned portion of EDS stock options and restricted stock  units assumed,  adjustments

107

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 6:  Acquisitions (Continued)

for depreciation expense for property,  plant and equipment, adjustments to interest expense and  related
tax effects.

In millions,  except per share data

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic net earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted net earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2008

$136,022
$ 7,828
3.15
$
3.05
$

Other acquisitions in fiscal 2008

HP also completed eight other acquisitions and a  minority interest purchase during fiscal 2008.

Total consideration for the acquisitions  and  the minority interest purchase was $1.6 billion, which
includes direct transaction costs, the fair  value of  stock  options assumed and  certain liabilities recorded
in connection with these transactions. HP  recorded $1.0  billion of  goodwill, $600  million  of  purchased
intangibles and $15 million of IPR&D  related  to  these  transactions.

The largest of these transactions was  the  acquisition  of  Exstream Software, LLC, which has  been

integrated into HP’s Imaging and Printing  Group. The total purchase  price paid was $720  million,
which  included direct transaction costs  as well as  certain debt  that was repaid  at the acquisition date. In
connection with this acquisition, HP  recorded $434 million  of  goodwill, $235 million of purchased
intangibles and expensed $11 million for  IPR&D.  HP is  amortizing the  purchased intangibles on a
straight-line basis over a weighted-average  estimated  life of 6.8 years.

Note 7: Goodwill and Purchased Intangible Assets

Goodwill

Goodwill allocated to HP’s business segments as of October 31,  2009 and 2008 and changes in  the

carrying  amount of goodwill during the  fiscal year ended October 31, 2009  are as follows:

Enterprise
Storage
and
Servers

Services

Personal
Systems Printing Financial Corporate
Investments

Services

Group

HP

Software Group

HP

Imaging
and

Total

Balance at October 31,  2008 . . . . . $16,284
Goodwill acquired during the

period . . . . . . . . . . . . . . . . . .
Goodwill adjustments . . . . . . . . .

—
545

$4,745

$6,162

In millions
$2,493 $2,463

$144

$44

$32,335

315
(55)

—
(22)

—
(6)

—
(3)

—
—

—
—

$44

315
459

$33,109

Balance at October 31, 2009 . . . . . $16,829

$5,005

$6,140

$2,487 $2,460

$144

During  fiscal 2009, HP recorded adjustments of approximately  $306 million to the estimated fair

values of EDS’s intangible assets and net  liabilities  acquired  resulting in an  increase to EDS’s goodwill,
which  is allocated  to the Services segment.  These changes  in the estimated fair values  relate primarily
to restructuring liabilities, fixed assets,  net deferred  tax liabilities and intangible assets. In addition,
goodwill increased approximately $255  million as a result of currency  translation related to certain  of

108

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 7:  Goodwill and Purchased Intangible Assets  (Continued)

EDS’s foreign subsidiaries whose functional currency is  not the U.S. dollar. These increases  in goodwill
were partially offset by tax adjustments for various previous acquisitions.

Based on the results of its annual impairment tests,  HP determined  that no  impairment of
goodwill existed as of August 1, 2009 or August  1, 2008. However, future  goodwill  impairment tests
could result in a charge to earnings. HP will  continue  to  evaluate  goodwill on an  annual basis as of the
beginning of its fourth fiscal quarter and whenever events and changes in  circumstances indicate that
there may be a potential impairment.

Purchased Intangible Assets

HP’s purchased intangible assets associated  with completed  acquisitions  for each of the  following

fiscal years ended October 31 are composed of:

Customer contracts, customer lists and
distribution agreements . . . . . . . . . .

Developed and core technology and

2009

Accumulated
Amortization

Gross

2008

Accumulated
Amortization

Net

Net

Gross

In millions

$ 6,763

$(3,034)

$3,729

$ 6,530

$(2,176)

$4,354

patents . . . . . . . . . . . . . . . . . . . . . .
Product trademarks . . . . . . . . . . . . . .

4,171
247

(2,747)
(222)

1,424
25

4,189
253

(2,147)
(109)

Total amortizable purchased intangible
assets . . . . . . . . . . . . . . . . . . . . . . .
Compaq trade name . . . . . . . . . . . . . .

11,181
1,422

(6,003)
—

5,178
1,422

10,972
1,422

(4,432)
—

2,042
144

6,540
1,422

Total purchased intangible assets . . . . .

$12,603

$(6,003)

$6,600

$12,394

$(4,432)

$7,962

For fiscal 2009, HP recorded an increase of $83 million  to  purchased intangibles as a result of

currency translation related to certain of EDS’s foreign subsidiaries whose functional currency is not
the U.S.  dollar. HP also recorded an increase of  $21 million to the estimated fair value  of EDS’s
intangible assets acquired.

Based on the results of its annual impairment tests, HP determined  that no  impairment of the
Compaq trade name existed as of August 1,  2009 or August 1, 2008. However, future impairment tests
could result in a charge to earnings. HP  will  continue to evaluate  the Compaq trade name on an
annual basis as of the beginning of its fourth fiscal quarter and  whenever events and changes in
circumstances indicate that there may be a potential impairment.

The finite-lived purchased intangible assets  consist of customer contracts, customer lists and
distribution agreements, which have weighted-average  useful  lives of 8 years, and developed and core
technology, patents and product trademarks,  which have  weighted-average useful lives of  5 years.

109

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 7:  Goodwill and Purchased Intangible Assets  (Continued)

Estimated future amortization expense  related to finite  lived purchased  intangible  assets at

October  31, 2009 is as follows:

Fiscal year:

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

In millions

$1,308
1,053
855
717
464
781

$5,178

Note 8: Restructuring Charges

Fiscal 2009 Restructuring Plan

In May 2009, HP’s management approved and  initiated a restructuring  plan to structurally change

and improve the effectiveness of the  Imaging  and  Printing Group (‘‘IPG’’), the  Personal  Systems  Group
(‘‘PSG’’), and Enterprise Storage and  Servers (‘‘ESS’’).  In  fiscal  2009, HP  recorded a net charge of
$297 million in severance-related costs  associated  with the planned  elimination  of  approximately
5,000 positions. As of October 31, 2009,  approximately 2,100 positions have  been eliminated.  HP
expects the majority of the restructuring  costs  to  be  paid  out  by the  fourth quarter of  fiscal  2010. In
future quarters, HP expects to record  an additional charge of approximately $6 million related to
severance costs associated with this plan.

Fiscal 2008 HP/EDS Restructuring Plan

In connection with the acquisition of EDS  on August 26, 2008, HP’s management approved and

initiated a restructuring plan to streamline  the combined  company’s services business and to better
align the structure and efficiency of that business with HP’s operating model. The restructuring plan is
expected to be implemented over four  years from  the acquisition date and includes  changes to the
combined company’s workforce as well  as changes to corporate overhead functions such  as real estate
and IT.

In the fourth quarter of fiscal 2008, HP recorded a  liability  of approximately  $1.8 billion  related to

this  restructuring plan. Approximately $1.5  billion of  the liability was associated with pre-acquisition
EDS and was recorded to goodwill, and  the remaining approximately $0.3 billion  was  associated with
HP and was recorded as a restructuring  charge. The liability consisted mainly  of severance costs to
eliminate approximately 25,000 positions,  costs to vacate duplicative facilities and  costs associated  with
early termination of certain contractual  obligations. HP recorded net charges for severance and
facilities costs of $346 million, for the twelve months  ended October  31, 2009, along  with year-to-date
adjustments to goodwill of $276 million.  As  of October  31, 2009, over 19,000 positions have been
eliminated.

HP expects the majority of the restructuring  costs to be paid out  by the second quarter of fiscal

2010. In future quarters, HP expects to record an  additional charge of  approximately $465  million
related to the cost to vacate duplicative facilities  and  severance costs.

110

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 8:  Restructuring Charges (Continued)

All restructuring costs associated with  pre-acquisition EDS are reflected in the  purchase  price of

EDS. These costs are subject to change  based on the actual costs  incurred. Changes  to  these  estimates
could decrease the amount of the purchase price  allocated to goodwill.

Prior Fiscal Year Plans

Restructuring plans initiated prior to  2008 are substantially complete and HP  expects to record

only minor revisions to these plans as necessary.

Summary of Restructuring Plans

The adjustments to the accrued restructuring expenses related to all of HP’s  restructuring plans

described above for the twelve months ended October 31, 2009 were as  follows:

As of October 31, 2009

Balance,
October 31,
2008

Fiscal
year 2009
charges

Goodwill

Cash

Non-cash
settlements
Balance,
and  other October 31, adjustments
2009

Total costs
and

to date

Total
expected
costs  and
adjustments

(reversals) adjustments payments adjustments

Fiscal 2009 Plan . . . . . . . . . . . . . . . . . .
Fiscal 2008 HP/EDS Plan:

$ —

$297

$ —

$

(59)

$ 10

$ 248

$ 297

$ 303

Severance . . . . . . . . . . . . . . . . . . . .
Infrastructure . . . . . . . . . . . . . . . . . .

$1,444
248

Total severance and other restructuring

activities . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . .

Prior fiscal year plans

$1,692
77

Total restructuring plans . . . . . . . . . . . . .

$1,769

$279
67

$346
(3)

$640

$ 96
180

$(1,106)
(47)

$ 34
(29)

$276
(2)

$274

$(1,153)
(25)

$(1,237)

$ 5
4

$ 19

$ 747
419

$1,166
51

$1,465

$1,910
500

$2,410
6,343

$9,050

$1,940
935

$2,875
6,343

$9,521

At October 31, 2009 and October 31,  2008, HP included  the long-term portion of  the restructuring
liability of $356 million and $670 million,  respectively,  in Other liabilities, and the short-term portion in
Accrued restructuring in the accompanying Consolidated Balance Sheets.

Workforce Rebalancing

As part of HP’s ongoing business operations, HP  incurred  workforce  rebalancing charges for
severance and related costs within certain business segments during fiscal 2009. Workforce rebalancing
activities are considered part of normal operations as HP  continues to optimize its cost  structure.
Workforce rebalancing costs are included  in HP’s business segment results, and HP expects to incur
additional workforce rebalancing costs  in  the future.

Note 9: Fair Value

HP adopted certain provisions of the new accounting standard  related  to  fair  value in the first and

fourth quarters of fiscal 2009. The adoption  did not have a material impact  on HP’s financial
statements and did not result in any changes to the opening balance of retained earnings as of
November 1, 2008. HP will adopt the  remaining provisions  related  to  the fair value of nonfinancial
assets and nonfinancial liabilities in the first quarter of fiscal 2010  for the following major categories of
nonfinancial assets and liabilities from the Consolidated Balance Sheet: Property, plant and equipment,
Goodwill, Purchased intangible assets,  and  the asset retirement  obligations within Other accrued
liabilities and Other liabilities.

111

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 9:  Fair Value (Continued)

The new standard codifies a new framework for measuring fair  value and expands related
disclosures. The framework requires fair value to be determined based on the exchange price that
would be received for an asset or paid to transfer a liability (an exit price) in the principal  or most
advantageous market for the asset or liability in an  orderly transaction between market participants.

The valuation techniques required by  the new provisions are  based upon  observable and
unobservable inputs. Observable or market inputs reflect market data  obtained from  independent
sources, while unobservable inputs reflect HP’s  assumptions about market participant assumptions
based on  best information available. Observable inputs are the  preferred source of values. These  two
types of inputs create the following fair value  hierarchy:

Level 1—Quoted prices (unadjusted)  for identical  instruments in  active  markets.

Level 2—Quoted prices for similar instruments  in active markets, quoted  prices  for identical or

similar instruments in markets that are  not  active, and model-based valuation techniques for which all
significant assumptions are observable in the  market  or  can be corroborated by observable market data
for substantially the full term of the assets or liabilities.

Level 3—Prices or valuations that require management inputs that are both significant  to  the fair

value measurement and unobservable.

The following section describes the valuation  methodologies  HP uses to measure  its  financial assets

and  liabilities at fair value.

Cash Equivalents and Investments: HP holds time  deposits, money market funds,  commercial
paper, other debt securities primarily consisting of corporate and foreign government notes and bonds,
and  common stock and equivalents. In general,  and  where applicable, HP uses quoted  prices in active
markets for identical assets to determine  fair value. If quoted prices in active markets for identical
assets are not available to determine fair value, HP uses quoted  prices for  similar assets  and liabilities
or inputs that are observable either directly or  indirectly. If  quoted prices  for identical or  similar assets
are not available, HP uses internally  developed valuation models, whose inputs include bid prices, and
third party valuations utilizing underlying assets assumptions.

Derivative Instruments: As discussed  in Note 10, HP mainly holds  non-speculative forwards,  swaps
and  options to hedge certain foreign currency and interest rate exposures. When active market quotes
are not available, HP uses industry standard  valuation  models. Where applicable, these  models project
future cash flows and discount the future amounts  to  a present value  using market-based  observable
inputs including interest rate curves, credit risk, foreign exchange rates, and forward and spot prices for
currencies. In certain cases, market-based observable inputs are not available  and, in  those cases,  HP
uses management  judgment to develop  assumptions which  are used to determine fair value.

112

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 9:  Fair Value (Continued)

The following table presents HP’s assets  and liabilities as of October  31, 2009 that are measured at

fair value on a recurring basis:

Assets
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market funds
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fair Value Measured Using

Level 1

Level 2

Level 3

Total
Balance

In millions

$ — $ 8,925
1,388
—
372
3
755

—
262
15
7
—

$— $ 8,925
1,388
262
423
10
756

—
—
36
—
1

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$284

$11,443

$37

$11,764

Liabilities
Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ — $

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ — $

773

773

$ 1

$ 1

$

$

774

774

The following tables present the changes in level 3  instruments in fiscal 2009  that  are measured  at

fair value on a recurring basis. The majority of the level  3 balances  consist of  investment securities
classified as available-for-sale with changes  in fair  value recorded  in other comprehensive  income
(‘‘OCI’’).

Fair Value Measured Using
Significant Unobservable Inputs
(Level 3)

Beginning balance at November 1, 2008 . . . . . . . . . . . . . . . . . . . . . . . .

$ 64

Total gains or losses (realized/unrealized):

In millions
$(1)

Included in earnings(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Included in other comprehensive income . . . . . . . . . . . . . . . . . . . .
Purchases, issuances, and settlements . . . . . . . . . . . . . . . . . . . . . . . .

(2)
(25)
(1)

2
(2)
1

Other Debt
Securities

Derivative
Instruments

Total

$ 63

—
(27)
—

Ending balance at October 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 36

$—

$ 36

The amount of total losses for the period included in earnings

attributable to the change in unrealized losses  relating to assets  still
held as  of October 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (2)

$—

$ (2)

(1)

Included in Interest and other, net in the  accompanying Consolidated Statements  of Earnings.

HP measures certain assets including cost  and equity method investments at fair value  on a

nonrecurring  basis. These assets are  recognized at fair value when  they are deemed to be
other-than-temporarily impaired. As  of  October  31, 2009,  such  assets with  a total fair value of

113

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 9:  Fair Value (Continued)

$39 million were measured using level  3 inputs. HP recorded an impairment  charge of $18 million
relating to these investments.

HP reviews the carrying values of the  investments  when  events and  circumstances warrant  and
considers all available evidence in evaluating when declines in  fair value are  other-than-temporary
declines. HP determines fair values for investments in  public companies  using quoted market prices and
records a charge to Interest and other, net when the change in fair values is determined to be an
other-than-temporary change. HP carries equity investments in  privately-held companies at  cost or at
fair value when HP recognizes an other-than-temporary impairment charge.

HP monitors its investment portfolio for  impairment on a periodic basis. In the  event that the
carrying value of an investment in debt  securities exceeds its fair value  and  the decline in value is
determined to be an other-than-temporary decline  and  1) HP does not intend to sell  the debt security,
and  2) when it is not more likely than not that HP will be required to sell the debt security prior to
recovery  of its amortized cost basis, HP records an impairment charge to Interest and other, net  in the
amount of the credit loss and the balance,  if any, to other comprehensive income.

Effective November 1, 2008, HP adopted the  accounting standards  related  to  financial instruments

which allows an entity to elect to measure  certain financial instruments at fair value on  a
contract-by-contract basis. Subsequent to the  election, any unrealized  gains and losses from  the fair
value measurement of the financial instruments will be recognized  in earnings. As  of  October 31,  2009,
HP did not elect such option for any eligible financial instruments.

114

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 10:  Financial Instruments

Available-for-Sale Investments

Cash equivalents and investments at fair value  for the  following  fiscal  years ended October 31 were

as follows:

2009

2008

Gross

Gross
Unrealized Unrealized Estimated
Fair Value
Loss

Gain

Cost

Cost

Gross

Gross
Unrealized Unrealized Estimated
Fair Value
Loss

Gain

Cash Equivalents

Time deposits . . . . . . . . . $ 8,870
1,388
Commercial paper . . . . . .
262
Money market funds . . . .

Total cash equivalents . . . . . $10,520

Investments
Debt securities:

Time deposits . . . . . . . . . $
Other debt securities . . . .

Total debt securities . . . . . . $

55
419

474

Equity securities in public

$—
—
—

$—

$—
49

$49

In millions

$ — $ 8,870 $5,397
1,306
919

1,388
262

—
—

$ — $10,520 $7,622

$ — $

(45)

55 $ 103
104
423

$(45)

$

478 $ 207

$—
—
—

$—

$—
1

$ 1

$ — $5,397
1,306
919

—
—

$ — $7,622

$ — $ 103
85

(20)

$(20)

$ 188

companies . . . . . . . . . . . $

3

$ 2

$ — $

5 $

3

$ 2

$ — $

5

Total cash equivalents and

investments . . . . . . . . . . . $10,997

$51

$(45)

$11,003 $7,832

$ 3

$(20)

$7,815

Cash equivalents consist of investments with original maturities of ninety days or less.

Available-for-sale securities consist of  short-term investments which mature within  twelve months or
less  and long-term investments with maturities longer than twelve months. Investments include time
deposits consisting of certificate of deposits, corporate  commercial paper  and other debt securities
consisting primarily of fixed-interest securities and institutional  bonds.  As discussed  in Note  9, HP
estimated the fair values of its investments based on quoted market prices or pricing models using
current market rates. These estimated fair  values may not  be  representative of actual  values  that  will be
realized in the future.

The gross unrealized loss as of October 31, 2009  was  due  primarily  to  declines in certain debt
securities. The gross unrealized loss includes $20  million  that has been  in a continuous loss position for
more than twelve months. The gross unrealized  loss as  of  October 31, 2008 had been in a continuous
loss position for less than twelve months.  HP  does not intend to sell  these debt securities and  it is not
likely that HP will be required to sell  these debt securities  prior to the recovery of the  amortized cost.

115

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 10:  Financial Instruments (Continued)

Contractual maturities of short-term and long-term investments  in available-for-sale securities at

October  31, 2009 were as follows:

Due in less than one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due in  1-5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due in more than five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Available-for-Sale
Securities

Cost

Estimated
Fair Value

In millions

$ 55
26
393

$474

$ 55
26
397

$478

Proceeds from sales and maturities of available-for-sale and other  securities  were $171  million  in

fiscal 2009. There were no realized gains  or  losses  on available-for-sale and other securities  in fiscal
2009. The specific identification method is used to account for gains and losses on  available-for-sale
securities.

A summary of the carrying values and balance sheet classification of  all short-term and  long-term
investments in debt and equity securities at  the following fiscal years ended October 31 was as follows:

2009

2008

In millions

Available-for-sale debt securities

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 55

$ 93

Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Available-for-sale debt securities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available-for-sale equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities in privately-held companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable trading securities and other  investments . . . . . . . . . . . . . . . . . . . . . . . . . . .

Included in long-term financing receivables and other assets . . . . . . . . . . . . . . . . . . . .

55

423
5
129
13

570

93

95
5
145
280

525

Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$625

$618

Equity securities in privately-held companies  include  cost basis and equity method investments.

Marketable trading securities and other  investments consist primarily of marketable trading securities
held to generate returns that HP expects  to offset changes in  certain liabilities related to deferred
compensation arrangements. HP includes gains or  losses from changes in fair value of these securities,
offset by losses or gains on the related liabilities, in Interest and other,  net, in  HP’s  Consolidated
Statements of Earnings. The net losses associated with these  securities were $14  million for fiscal 2009.
The net gains associated with these securities were  $5 million for fiscal 2008.

Derivative Financial Instruments

On February 1, 2009, HP adopted the accounting  standards related  to  derivative instruments and

hedging. The adoption requires additional  disclosures  about HP’s objectives  and strategies for using
derivative instruments, the accounting for  the derivative instruments and related hedged items and the

116

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 10:  Financial Instruments (Continued)

effect of derivative instruments and related  hedged items on  the financial statements. The adoption had
no financial impact on the consolidated financial statements.

HP is a  global company that is exposed to foreign  currency exchange rate fluctuations and interest

rate changes in the normal course of  its  business. As part  of  its risk management  strategy, HP  uses
derivative instruments, primarily forward contracts, option contracts, interest rate swaps,  and total
return swaps, to hedge certain foreign currency, interest rate and, to a lesser extent, equity exposures.
HP’s objective is to offset gains and losses resulting from these exposures with losses  and gains on the
derivative contracts used to hedge them,  thereby reducing volatility of earnings or protecting  fair values
of assets and liabilities. HP does not have  any  leveraged derivatives.  HP does not use  derivative
contracts for speculative purposes. HP designates  its  derivatives as  fair value hedges, cash  flow hedges
or hedges of the foreign currency exposure  of  a  net investment  in a foreign  operation (‘‘net investment
hedges’’). Additionally, for derivatives  not designated  as hedging instruments, HP categorizes those
economic hedges as other derivatives. HP  recognizes all  derivatives  in the Consolidated Balance Sheets
at fair value and reports them in Other  current  assets, Long-term financing receivables and  other
assets, Other accrued liabilities, or Other liabilities. HP  classifies cash flows from the derivative
programs as operating activities in the Consolidated Statement of  Cash Flows.

As a  result of the use of derivative instruments, HP is exposed to the  risk that counterparties  to
derivative contracts will fail to meet their contractual  obligations. To mitigate the counterparty credit
risk, HP has a policy of only entering into contracts with carefully  selected  major financial institutions
based upon their credit ratings and other  factors, and HP maintains dollar and term limits  that
correspond to each institution’s credit rating. HP’s  established policies and procedures for  mitigating
credit risk on principal transactions and short-term cash include reviewing and establishing limits  for
credit exposure and continually assessing the creditworthiness of counterparties. Master agreements
with counterparties include master netting  arrangements as further mitigation of credit exposure  to
counterparties. These arrangements permit HP to net  amounts due  from HP to a  counterparty  with
amounts due to HP from a counterparty, which reduces  the maximum  loss from  credit risk in  the event
of counterparty default.

Certain of HP’s derivative instruments contain credit-risk-related contingent  features, such  as a
provision whereby the counterparties  to  the derivative instruments could request collateralization on
derivative instruments in net liability positions if HP’s credit rating falls below investment  grade.  As of
October  31, 2009, HP was not required to post any collateral, and HP did not have  any derivative
instruments with credit-risk-related contingent features that were in a significant net liability position.

Fair Value Hedges

HP enters into fair value hedges to reduce the  exposure of its debt portfolio to interest rate risk.
HP issues long-term debt in U.S. dollars  based on market conditions at the  time of  financing.  HP uses
interest rate swaps to modify the market  risk exposures in connection with the debt to achieve primarily
U.S. dollar LIBOR-based floating interest expense. The swap transactions generally  involve  principal
and  interest obligations for U.S. dollar-denominated amounts.  Alternatively, HP may  choose  not  to
swap fixed for floating interest payments  or may  terminate a previously  executed  swap if it believes a
larger proportion of fixed-rate debt would  be  beneficial. When investing in  fixed-rate instruments, HP
may enter into interest rate swaps that convert the fixed interest returns into  variable interest returns
and  would classify these swaps as fair value hedges.  For  derivative instruments that are  designated and

117

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 10:  Financial Instruments (Continued)

qualify  as fair value hedges, HP recognizes the gain or loss  on the derivative instrument,  as well as the
offsetting loss or gain on the hedged item, in Interest and other,  net in  the Consolidated Statements of
Earnings in the current period.

Cash Flow Hedges

HP uses a combination of forward contracts  and options  designated as  cash flow hedges to protect

against the foreign currency exchange rate risks  inherent  in  its  forecasted net  revenue and, to a lesser
extent, cost of sales, operating expense,  and intercompany lease  loan denominated in  currencies  other
than  the U.S. dollar. HP’s foreign currency cash  flow hedges mature  generally within  six to twelve
months. However, certain leasing revenue-related  forward contracts and  intercompany lease  loan
forward contracts extend for the duration of  the lease term, which can be up to five years. For
derivative instruments that are designated and qualify as cash flow hedges, HP initially records the
effective portion of the gain or loss on the  derivative instrument  in accumulated other comprehensive
loss as a separate component of stockholders’ equity and subsequently reclassifies  these  amounts  into
earnings in the period during which the  hedged transaction is recognized in earnings. HP reports the
effective portion of cash flow hedges in the same financial statement line item  as the changes  in value
of the hedged item. During fiscal 2009 and 2008, HP  did not discontinue any cash flow  hedge  for which
it was probable that a forecasted transaction would not occur.

Net Investment Hedges

HP uses forward contracts designated as  net investment  hedges  to  hedge  net  investments in certain

foreign subsidiaries whose functional currency  is the  local currency. These  derivative instruments are
designated as net investment hedges  and,  as such, HP records the effective portion  of  the gain or loss
on the derivative instrument together with  changes  in the  hedged items  in cumulative  translation
adjustment as a separate component of  stockholders’  equity.

Other Derivatives

Other derivatives not designated as hedging instruments consist primarily of forward  contracts HP

uses to hedge foreign currency balance  sheet exposures.  HP also uses total return swaps and,  to  a lesser
extent, interest rate swaps, based on the  equity and fixed income indices,  to  hedge its executive
deferred compensation plan liability. For derivative instruments not  designated as  hedging instruments,
HP recognizes changes in the fair values  in earnings  in the  period  of  change. HP recognizes  the gain or
loss on foreign currency forward contracts  used  to  hedge balance sheet exposures  in Interest and other,
net in  the same period as the remeasurement gain and loss of the related foreign currency
denominated assets and liabilities. HP  recognizes the gain or loss on the  total return swaps  and interest
rate swaps in Interest and other, net in  the same period as the  gain or loss from the  change  in market
value of the executive deferred compensation plan  liability.

Hedge Effectiveness

For interest rate swaps designated as fair  value hedges, HP  measures effectiveness by offsetting the

change  in fair value of the hedged debt  with the change in  fair value of the  derivative. For foreign
currency options and forward contracts designated as cash  flow  or  net investment hedges, HP measures
effectiveness by comparing the cumulative change in  the hedge contract  with the cumulative change in

118

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 10:  Financial Instruments (Continued)

the hedged item, both of which are based on forward  rates. HP  recognizes any ineffective portion of
the hedge, as well as amounts not included in  the assessment of effectiveness, in the  Consolidated
Statements of Earnings. As of October 31, 2009,  the portion of hedging instruments’  gain or loss
excluded from the assessment of effectiveness  was not material  for fair value, cash  flow or  net
investment hedges. Hedge ineffectiveness for fair value, cash flow and net investment hedges was not
material in fiscal years 2009, 2008 and 2007.

Fair Value of Derivative Instruments in the Consolidated Balance Sheet

As discussed in Note 9, HP estimates the fair values of derivatives primarily  based on pricing
models using current market rates and records all derivatives on the balance sheet at fair value. The
gross notional and fair value of derivative  financial instruments in  the Consolidated Balance Sheet as of
October  31, 2009 were as follows:

As of October 31, 2009

Gross
Notional(1)

Other
Current
Assets

Long-term
Financing
Receivables
and
Other Assets

In millions

Other
Accrued
Liabilities

Other
Liabilities

Derivatives designated as hedging instruments
Fair value hedges:

Interest rate contracts . . . . . . . . . . . . . . . . . .

$ 7,575

$ —

$346

$ —

$

5

Cash flow hedges:

Foreign exchange contracts . . . . . . . . . . . . . .

15,056

116

Net investment hedges:

Foreign exchange contracts . . . . . . . . . . . . . .

1,350

13

12

12

389

47

33

39

Total derivatives designated as hedging

instruments . . . . . . . . . . . . . . . . . . . . . . . . .

$23,981

$129

$370

$436

$ 77

Derivatives not designated as  hedging

instruments

Foreign exchange contracts . . . . . . . . . . . . . . . .
Interest rate contracts(2) . . . . . . . . . . . . . . . . . .
Total return contracts . . . . . . . . . . . . . . . . . . . .

$16,104
2,211
268

Total derivatives not designated as hedging

instruments . . . . . . . . . . . . . . . . . . . . . . . . .

$18,583

Total derivatives . . . . . . . . . . . . . . . . . . . . . . . .

$42,564

$206
—
2

$208

$337

$ 20
29
—

$ 49

$419

$163
—
2

$165

$601

$ 51
45
—

$ 96

$173

(1) Represents the face amounts of contracts that  were outstanding  as of October 31, 2009.

(2) Represents offsetting swaps acquired  through previous business combination  that  were not

designated as hedging instruments.

119

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 10:  Financial Instruments (Continued)

Effect  of Derivative Instruments on the Consolidated Statements of Earnings

The before-tax effect of a derivative  instrument and related  hedged item in a fair  value hedging

relationship for fiscal year ended October 31,  2009 was as follows:

Derivative Instrument

Location

2009

Hedged  Item

Location

2009

Interest rate contracts . . . . . . . . . . . . . Interest and

other, net

In millions
$232

Fixed-rate debt

In millions
$(236)

Interest  and
other, net

Gain (Loss) Recognized in Income on  Derivative  and Related Hedged Item

The before-tax effect of derivative instruments in cash  flow and net investment hedging

relationships for fiscal 2009 was as follows:

Gain (Loss)
Recognized in
OCI on Derivative
(Effective Portion)

2009

In millions

Gain (Loss) Reclassified from
Accumulated  OCI Into Income
(Effective Portion)

Gain Recognized in
Income on Derivative(1)
(Ineffective portion
and Amount Excluded
from Effectiveness Testing)

Location

2009

In millions

Location

2009

In millions

Cash flow  hedges:

Foreign exchange

contracts

. . . . . . . .

$(1,044)

Net revenue

$475

Net revenue

Foreign exchange

contracts

. . . . . . . .

115

Foreign exchange

contracts

. . . . . . . .

Foreign exchange

contracts

. . . . . . . .

Foreign exchange

contracts

. . . . . . . .

Total cash flow

(3)

1

29

hedges

. . . . . . . .

$ (902)

Net investment hedges:
Foreign exchange

Cost of products
Other operating
expenses

Interest and other, net

Net revenue

Cost of products
Other operating
expenses

Interest and  other,  net

Interest and other, net

142

(4)

(4)

9

$618

$—

—

—

—

7

$ 7

contracts

. . . . . . . .

$ (169)

Interest and other, net

$ —

Interest and other, net

$—

(1)

Amount of gain recognized in income on derivative represents a $7 million gain related to the amount excluded from the
assessment of hedge effectiveness in fiscal 2009.

HP expects to reclassify net accumulated other comprehensive  loss of $167 million,  net of taxes, to
earnings in the next twelve months along with the earnings  effects of  the  related forecasted transactions
in association with cash flow hedges.

120

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 10:  Financial Instruments (Continued)

The before-tax effect of derivative instruments not designated  as hedging instruments on  the

Consolidated Statements of Earnings  for fiscal 2009 was as follows:

Gain (Loss) Recognized in Income on Derivative

Location

2009

In millions

Foreign exchange contracts . . . . . . . . . . . . . . . . . . .
Total return contracts . . . . . . . . . . . . . . . . . . . . . . .
Interest rate contracts . . . . . . . . . . . . . . . . . . . . . . .

Interest and other, net
Interest and other, net
Interest and other, net

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(989)
(1)
1

$(989)

Other Financial Instruments

For the balance of HP’s financial instruments, accounts  receivable, financing receivables,  notes
payable and short-term borrowings, accounts payable  and  other accrued liabilities, the carrying amounts
approximate fair value due to their short  maturities. The estimated fair  value of HP’s short- and
long-term debt was approximately $16.0  billion  at October 31,  2009, compared to a carrying value  of
$15.8 billion at that date. The estimated  fair value  of  the debt is based primarily on quoted  market
prices, as well as borrowing rates currently available to HP for  bank  loans with similar terms and
maturities.

Note 11: Financing Receivables and Operating  Leases

Financing receivables represent sales-type and direct-financing leases resulting from the  marketing
of HP’s and third-party products. These receivables typically have  terms from two to five years and are
usually collateralized by a security interest in the underlying assets. Financing receivables  also include
billed receivables from operating leases. The  components of net financing receivables, which are
included in financing receivables and  long-term financing receivables and  other assets,  were as follows
for the following fiscal years ended October 31:

Minimum lease payments receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unguaranteed residual value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 6,413
(108)
244
(571)

$ 5,338
(90)
254
(466)

Financing receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,978
(2,675)

5,036
(2,314)

Amounts due after one year, net

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 3,303

$ 2,722

2009

2008

In millions

121

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 11:  Financing Receivables and Operating Leases (Continued)

As of October 31, 2009, scheduled maturities of HP’s minimum lease payments receivable were as

follows for the following fiscal years ended October 31:

2010

2011

2012

2013

Thereafter

Total

Scheduled maturities of minimum lease  payments
receivable . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,956

$1,816

$1,007

$427

$207

$6,413

Equipment leased to customers under  operating leases  was  $3.0 billion  at October 31, 2009  and

$2.3 billion at October 31, 2008 and is included  in machinery  and equipment.  Accumulated
depreciation on equipment under lease was  $0.9 billion at October  31, 2009  and $0.5  billion at
October 31, 2008. As of October 31,  2009, minimum  future rentals on non-cancelable  operating leases
related to leased equipment were as follows  for the  following  fiscal  years  ended October 31:

Minimum future rentals on non-cancelable  operating

leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$976

$647

$336

$114

$49

$2,122

2010

2011

2012

2013

Thereafter

Total

Note 12: Guarantees

Guarantees and Indemnifications

In the ordinary course of business, HP may provide  certain clients  with subsidiary  performance

guarantees and/or financial performance guarantees, which  may be backed by standby letters of credit
or surety bonds. In general, HP would be liable  for the  amounts of these guarantees  in the event  HP or
HP’s subsidiaries’ nonperformance permits termination  of the related  contract  by  the client, the
likelihood of which HP believes is remote. HP  believes that the  company is in compliance with the
performance obligations under all material service  contracts  for which there is  a performance
guarantee.

As a result of the acquisition of EDS, HP acquired certain service contracts supported by client

financing or securitization arrangements.  Under specific circumstances  involving nonperformance
resulting in service contract termination or failure to comply  with terms  under the financing
arrangement, HP would be required  to  acquire certain assets.  HP considers the possibility of its failure
to comply to be remote and the asset  amounts involved to be immaterial.

In the ordinary course of business, HP enters  into  contractual  arrangements under which  HP may

agree to  indemnify the third party to such arrangement from any losses incurred relating to the  services
they perform on behalf of HP or for  losses arising  from certain events as defined within the  particular
contract, which may include, for example,  litigation  or claims relating to past performance.  Such
indemnification obligations may not be  subject to maximum loss clauses. Historically, payments made
related to these indemnifications have  been  immaterial.

Warranty

HP provides for the estimated cost of product warranties at the time  it recognizes revenue.  HP

engages in extensive product quality programs and processes,  including actively monitoring and
evaluating the quality of its component suppliers; however, product  warranty terms offered to
customers, ongoing product failure rates, material  usage and service delivery costs incurred in

122

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 12:  Guarantees (Continued)

correcting a product failure, as well as specific product  class  failures outside of HP’s baseline
experience, affect the estimated warranty obligation. If actual  product failure rates, repair rates or any
other  post sales support costs differ from these estimates,  revisions to the estimated warranty liability
would be required.

The changes in HP’s aggregate product  warranty liabilities were as follows for the following fiscal

years ended October 31:

Product warranty liability at beginning  of year . . . . . . . . . . . . . . . . . . . . .
Accruals for warranties issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments related to pre-existing warranties (including  changes in

2009

2008

In millions

$ 2,614
2,701

$ 2,376
3,351

estimates) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements made  (in cash or in kind) . . . . . . . . . . . . . . . . . . . . . . . . . . .

(223)
(2,683)

(107)
(3,006)

Product warranty liability at end of year . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,409

$ 2,614

Note 13: Borrowings

Notes Payable and Short-Term Borrowings

Notes payable and short-term borrowings, including the current portion of  long-term debt,  were as

follows for the following fiscal years ended October 31:

Current portion of long-term debt . . . . . . . . . . . . .
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . .
Notes payable to banks, lines of credit and other . .

2009

2008

Amount
Outstanding

Weighted-
Average

Amount

Interest Rate Outstanding

Weighted-
Average
Interest Rate

$1,143
294
413

$1,850

In millions

1.0%
1.2%
2.0%

$ 2,674
7,146
356

$10,176

4.3%
2.7%
5.3%

Notes payable to banks, lines of credit and  other includes deposits associated with  HP’s banking-

related activities of approximately $326  million and $262 million at October 31, 2009 and 2008,
respectively.

123

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 13:  Borrowings (Continued)

Long-Term Debt

Long-term debt was as follows for the following fiscal  years ended October 31:

2009

2008

In millions

U.S. Dollar Global Notes

2002 Shelf Registration Statement:

$500 issued at discount to par of 99.505% in June  2002 at  6.5%, due July  2012

$

499

$

499

2006 Shelf Registration Statement:

$600 issued at par in February 2007  at  three-month USD LIBOR plus 0.11%,

due March 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$900 issued at discount to par of 99.938% in February 2007 at 5.25%, due

March 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$500 issued at discount to par of 99.694% in February 2007 at 5.4%, due

March 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,000 issued at par in June 2007 at three-month USD LIBOR plus 0.01%,

600

900

499

600

900

499

due June 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

1,000

$1,000 issued at par in June 2007 at three-month USD LIBOR plus 0.06%,

due June 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,000

1,000

$750 issued at par in March 2008 at three-month USD LIBOR plus  0.40%,

due September 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

750

$1,500 issued at discount to par of 99.921% in March 2008  at  4.5%,  due

March 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,499

1,499

$750 issued at discount to par of 99.932% in March 2008 at  5.5%,  due March

2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,000 issued at discount to par of 99.561% in December 2008 at  6.125%, due
March 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$275 issued at par in February 2009  at three-month  USD  LIBOR plus 1.75%,

750

750

1,992

due February 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

275

$1,000 issued at discount to par of 99.956% in February 2009 at 4.25%, due

February 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,000

$1,500 issued at discount to par of 99.993% in February 2009 at 4.75%, due

June 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,500

2009 Shelf Registration Statement:

$750 issued at par in May 2009 at three-month USD LIBOR  plus 1.05%, due

May 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

750

$1,000 issued at discount to par of 99.967% in May 2009  at  2.25%, due May

2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,000

$250 issued at discount to par of 99.984% in May 2009  at  2.95%, due August

2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

250

—

—

—

—

—

—

—

12,514

7,497

124

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 13:  Borrowings (Continued)

EDS Senior Notes

$700 issued October 1999 at 7.125%,  due October 2009 . . . . . . . . . . . . . . . . . . .
$1,100 issued June 2003 at 6.0%, due August 2013 . . . . . . . . . . . . . . . . . . . . . . .
$300 issued October 1999 at 7.45%, due  October 2029 . . . . . . . . . . . . . . . . . . . .

2009

2008

In millions

—
1,140
315

1,455

712
1,150
316

2,178

Other, including capital lease obligations,  at 3.75%-8.63%,  due in calendar year

2009-2029 and at 3.75%-8.63%, due  in calendar year 2008-2029 . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value adjustment related to hedged debt
Less: current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

785
369
(1,143)

597
78
(2,674)

Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$13,980

$ 7,676

HP may redeem some or all of the Global Notes set forth  in the  above table  at any time  at the

redemption prices described in the prospectus supplements relating thereto. The Global  Notes are
senior unsecured debt.

HP registered the sale of up to $3.0 billion of  debt or global  securities, common stock,  preferred

stock, depositary shares and warrants  under  a shelf registration statement in  March 2002 (the ‘‘2002
Shelf Registration Statement’’). The 2002 Shelf Registration Statement expired on  December 1,  2008,
and, accordingly, HP is no longer able  to  issue any additional securities under this registration
statement.

In May 2009, HP filed a shelf registration statement (the ‘‘2009 Shelf Registration Statement’’)

with the Securities and Exchange Commission (‘‘SEC’’)  to  enable  the  company to offer for  sale, from
time to time, in one or more offerings, an unspecified amount  of  debt  securities, common  stock,
preferred stock, depositary shares and  warrants.  The  2009 Shelf  Registration  Statement replaced a
similar registration statement filed in May  2006 that expired in May 2009.

In May 2008, HP’s Board of Directors  approved an  increase in the capacity  of HP’s U.S.

commercial paper program by $10.0 billion to $16.0  billion.  HP’s  subsidiaries  are authorized to issue  up
to an additional $1.0 billion of commercial  paper, of which $500  million of  capacity is currently
available to be used by Hewlett-Packard  International Bank PLC, a  wholly-owned subsidiary  of HP, for
its  Euro Commercial Paper/Certificate  of Deposit  Programme.

In October 2008, HP registered for the Commercial Paper Funding Facility (‘‘CPFF’’)  provided by

the Federal Reserve Bank of New York.  The  facility enables  HP to issue  three-month unsecured
commercial paper through a special purpose vehicle  of  the  Federal  Reserve at a rate established by the
CPFF  program, which is currently equal to a spread  over the three-month overnight  index swap rate.
The maximum amount of commercial  paper that  HP may issue at any time  through this program  is
$10.4 billion less the total principal amount of all  other outstanding commercial paper that HP has
issued. The CPFF program is currently scheduled  to  expire  on February  1, 2010. As of October  31,
2009, HP had not issued any commercial  paper under the CPFF  program.

HP has a $2.9 billion five-year credit  facility expiring in  May  2012. In February and July  2008, HP

entered into additional 364-day credit facilities of $3.0  billion  and  $8.0 billion, respectively. The

125

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 13:  Borrowings (Continued)

February 2008 credit facility expired in  February 2009, at which time HP entered into a  new $3.5  billion
364-day credit facility. HP terminated the July 2008 credit facility in  June  2009, which reduced the  total
amount available under its credit facilities to $6.4 billion. Commitment  fees,  interest rates and other
terms of borrowing under the credit facilities  vary  based on HP’s external credit  ratings. The credit
facilities are senior unsecured committed borrowing  arrangements primarily  to  support the issuance of
U.S. commercial paper. HP’s ability to  have a U.S. commercial paper outstanding  balance  that  exceeds
the $6.4 billion supported these credit facilities  is subject  to a number  of factors, including liquidity
conditions and business performance.

HP also maintains uncommitted lines of credit from a number of  financial institutions that are
available through various foreign subsidiaries. The amount available for use  as of October  31, 2009 was
approximately $1.6 billion.

Included  in Other, including capital lease obligations, are borrowings  that  are collateralized by

certain financing receivable assets. As of October 31, 2009, the carrying value  of the assets
approximated the carrying value of the borrowings  of  $10 million.

At October 31, 2009, HP was able to issue an unspecified amount of additional debt securities,

common stock, preferred stock, depositary shares and  warrants  under the 2009  Shelf Registration
Statement. As of that date, HP also had  up to approximately $17.8 billion of available borrowing
resources, including $16.2 billion under  its commercial paper programs, $6.4  billion of which is
supported by its credit facilities, and approximately $1.6 billion under  other  programs.

Aggregate future maturities of long-term  debt at  face value (excluding  a fair value adjustment
related to hedged debt of $369 million, a premium on debt issuance of $56  million, and a discount on
debt issuance of $28 million) were as follows at  October 31, 2009:

2010

2011

2012

2013

2014

Thereafter

Total

In millions

Aggregate future maturities of debt
outstanding including capital lease
obligations . . . . . . . . . . . . . . . . . . . . . . . . . $1,143 $2,121 $3,406 $2,654 $3,520

$1,882

$14,726

Interest expense on borrowings was approximately $597 million in fiscal 2009,  $467 million in fiscal

2008, and $531 million in fiscal 2007.

Note 14: Taxes on Earnings

The domestic and foreign components of earnings were  as follows for the following fiscal years

ended October 31:

U.S.
Non-U.S.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,569
$6,846

In millions
$ 2,232
$ 8,241

$3,577
$5,600

2009

2008

2007

$9,415

$10,473

$9,177

126

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 14:  Taxes on Earnings (Continued)

The provision for (benefit from) taxes on earnings was as  follows for the following fiscal years

ended October 31:

U.S. federal taxes:

2009

2008

2007(1)

In millions

Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

47
956

$ 405
686

$ 639
229

Non-U.S. taxes:

Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,156
(356)

922
(85)

1,281
(125)

State taxes:

Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

173
(221)

44
172

67
(178)

$1,755

$2,144

$1,913

(1) HP has revised the presentation for the fiscal years ended October 31, 2007  regarding the tax

benefit of stock option plans for comparability purposes. The  largest impacts of  the revision was an
increase in the current U.S. federal tax provision of $428 million and a decrease in the deferred
U.S. federal tax provision of $428 million. This change does not affect previously reported results
of operations or financial position for any periods  presented, or  previously reported totals for the
provision  for (benefit from) taxes on earnings.

127

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 14:  Taxes on Earnings (Continued)

The significant components of deferred tax assets and deferred tax liabilities were as follows for

the following fiscal years ended October 31:

2009

2008

Deferred
Tax
Assets

Deferred
Tax
Liabilities

Deferred
Tax
Assets

Deferred
Tax
Liabilities

In millions

Loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit  carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unremitted earnings of foreign subsidiaries . . . . . . . . . . . . . .
Inventory valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intercompany transactions — profit in  inventory . . . . . . . . . .
Intercompany transactions — excluding  inventory . . . . . . . . .
Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee and retiree benefits . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable allowance . . . . . . . . . . . . . . . . . . . . . . .
Capitalized research and development . . . . . . . . . . . . . . . . . .
Purchased intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 9,191
1,444
—
111
534
1,328
119
794
2,692
300
879
28
459
81
949
1,599

Gross deferred tax assets and liabilities . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

20,508
(8,678)

—
7,555
6
16
—
9
38
80
4
—
1,594
17
—
12
82

9,413
—

$ 1,753
1,549
—
169
553
324
152
793
1,955
299
1,192
30
596
70
918
768

11,121
(1,801)

$ —
—
5,683
6
—
—
8
—
123
3
—
1,961
—
—
—
83

7,867
—

Total deferred tax assets and liabilities . . . . . . . . . . . . . . . . .

$11,830

$9,413

$ 9,320

$7,867

The breakdown between current and  long-term deferred  tax assets and deferred  tax liabilities was

as follows for the following fiscal years ended October 31:

2009

2008

In millions

Current deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 4,979
(83)
1,751
(4,230)

$ 3,920
(97)
792
(3,162)

Total deferred tax assets net of deferred  tax  liabilities . . . . . . . . . . . . . . . . . . . . . .

$ 2,417

$ 1,453

As of October 31, 2009, HP had $1.0 billion, $3.5 billion and $30.5 billion  of  federal, state and
foreign net operating loss carryforwards,  respectively. Amounts included in  each  of these  respective
totals begin to expire in fiscal 2010. Of  the $30.5 billion  of  foreign net  operating losses, $24.1 billion
relates to foreign losses arising in fiscal 2009  pursuant to internal restructuring transactions. HP has
provided a valuation allowance of $218 million for  deferred  tax assets  related to federal and state net

128

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 14:  Taxes on Earnings (Continued)

operating losses and $8.0 billion on deferred  tax assets  related  to  foreign net operating  loss
carryforwards that HP does not expect to realize.

As of October 31, 2009, HP had recorded deferred tax assets for various tax credit carryforwards

of $1.4 billion. This amount includes $687  million of foreign  tax credit carryforwards which begin to
expire in fiscal 2015, and against which HP has  recorded a valuation  allowance  of  $47 million. HP had
alternative minimum tax credit carryforwards  of  $9 million, which  do not  expire, and research and
development credit carryforwards of $395  million, which  will begin  to  expire in  fiscal 2019. HP  also had
tax credit carryforwards of $350 million in various states  and foreign countries, for which  HP has
provided a valuation allowance of $179 million to reduce the  related deferred tax  asset. These  credits
begin to expire in fiscal 2010.

Gross deferred tax assets at October 31, 2009 and 2008 were reduced by valuation allowances  of

$8.7 billion and $1.8 billion, respectively. The valuation allowance increased by $6.9 billion in fiscal
2009. The valuation allowance increase consisted of $7.0 billion associated with  foreign net operating
loss carryovers arising in fiscal 2009 pursuant to internal restructuring transactions, reduced by
$100 million of valuation allowance decreases associated with state and foreign net operating  losses.

Gross deferred tax assets at October 31, 2008 and 2007 were reduced by valuation allowances  of
$1.8 billion and $1.5 billion, respectively. The valuation allowance increased by $258 million in  fiscal
2008. The valuation allowance increases consisted of $449 million recorded  for deferred tax  assets
acquired in current year acquisitions, $126 million  recorded for deferred tax assets related to certain
federal and state net operating loss carryovers  and tax credits,  and $47 million related to deferred  tax
assets for foreign tax credit carryovers. These increases  were  partially offset by a $203 million  net
reduction in the valuation allowances due to adjustments to  deferred  tax  assets related to foreign  net
operating loss carryovers, and $161 million in the valuation allowances for deferred  tax assets related to
foreign tax credits  and net operating losses  carryovers as a result of the  adoption of the accounting
guidance for uncertainty in income taxes.

Net excess tax benefits resulting from the exercise  of employee stock options and other employee

stock programs, are recorded as an increase in stockholders’ equity and were approximately
$163 million in fiscal 2009, $316 million in fiscal 2008,  and $530 million in fiscal 2007.

The differences between the U.S. federal statutory income tax  rate  and  HP’s  effective  tax rate

were as follows for the following fiscal years ended October 31:

U.S. federal statutory income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
State income taxes, net of federal tax benefit
Lower rates in other jurisdictions, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign net operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued taxes due to post-acquisition integration . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2009

2008

2007

35.0% 35.0% 35.0%
0.5
1.3
0.9
(13.2)
(16.9)
(12.2)
(0.6)
(0.5)
(0.4)
(4.1) —
—
(0.6) — (1.7)
—
2.0
0.6
0.8
(0.5)
(0.5)

18.6% 20.5% 20.8%

129

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 14:  Taxes on Earnings (Continued)

In fiscal 2009, HP recorded $547 million of net income tax benefits  related to items unique to the

year. The recorded amounts included $383 million of income tax benefits attributable  to  net deferred
tax assets for foreign net operating loss carryovers  arising pursuant to internal restructuring
transactions. Also  included were a net tax  benefit of $154 million  for the  adjustment to estimated fiscal
2008 tax accruals upon filing the 2008  income tax returns, a  $60 million income tax  benefit for
valuation allowance reversals for state and foreign net operating losses,  and other miscellaneous items
that resulted in a net tax charge of $50 million.

In fiscal 2008, HP recorded $251 million of net income tax expense related to items unique to the

year. The recorded amounts consisted of a tax charge of  $205 million associated  with post-acquisition
EDS integration, $44 million for the adjustment to estimated fiscal 2007  tax accruals upon filing the
2007 U.S. federal income tax return, and net  tax  charges  of  $2 million attributable to other items.

In October 2008, the Emergency Economic Stabilization  Act of 2008 was signed  into  law, which
included a retroactive two year extension  of the  research and development tax  credit from  January 1,
2008 through December 31, 2009. The retroactive  income tax benefit  of $45 million was recorded  in
HP’s financial statements in the fourth quarter  of fiscal 2008.

In fiscal 2007, HP recorded $80 million of net income tax benefit related to items unique to the

year. The recorded amounts consisted of income tax benefits for valuation allowance  reversals of
$154 million attributable to deferred  tax  assets for state tax credits and $60 million attributable to
deferred tax assets for foreign net operating losses,  offset  by a $96 million net increase to various tax
reserves, a net tax charge of $18 million  for the adjustment to estimated fiscal  2006 tax  accruals upon
filing the 2006 U.S. federal and state  income  tax returns, and  a net tax charge of $20 million for other
items.

As a  result of certain employment actions  and capital investments  HP has  undertaken,  income
from manufacturing and services in certain countries  is subject to reduced tax rates, and in some cases
is wholly  exempt from taxes, through 2022.  The  gross income tax benefits attributable to the tax status
of these subsidiaries were estimated to be $853 million  ($0.35 per share) in fiscal  year 2009,
$900 million ($0.35 per share) in fiscal year 2008,  and  $1.2 billion ($0.43 per share) in  fiscal  year  2007.
The gross income tax benefits were offset  partially by accruals of U.S. income taxes  on undistributed
earnings, among other factors.

The total amount of gross unrecognized  tax  benefits was $1.9 billion  as of October 31, 2009,  of

which up to $950 million would affect HP’s effective tax rate if realized. A reconciliation of the
beginning and ending amount of unrecognized tax benefits is  as follows:

Balance at November 1, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,333

Increases:

For current year’s tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For prior years’ tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Decreases:

For prior years’ tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statute of limitations expiration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements with taxing authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

115
626

(762)
(293)
(131)

Balance at October 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,888

130

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 14:  Taxes on Earnings (Continued)

HP recognizes interest income from favorable settlements and income tax  receivables and  interest

expense and penalties accrued on unrecognized tax  benefits  within income tax expense.  As of
October 31, 2009, HP had accrued a net $115 million payable for interest  and penalties.  During fiscal
2009, HP recognized net interest income on tax overpayments and deficiencies, net of tax, of
$40 million.

HP engages in continuous discussion and negotiation with taxing authorities regarding  tax matters
in the  various jurisdictions. HP does  not  expect complete  resolution of any IRS  audit cycle within the
next 12 months. However, it is reasonably possible that certain  foreign and state  tax issues may be
concluded in the next 12 months, including issues  involving transfer  pricing and other matters.
Accordingly, HP believes it is reasonably possible that  its existing unrecognized  tax benefits may be
reduced by an amount up to $120 million  within the next twelve months.

HP is subject to income tax in the United States  and  over sixty foreign countries and is  subject to

routine corporate income tax audits in many of these jurisdictions.  In addition,  HP is  subject to
numerous ongoing audits by state and foreign tax authorities. HP has  received  from the IRS  Notices of
Deficiency for its fiscal 1999, 2000, 2003, 2004  and 2005 tax years, and Revenue Agent’s Reports
(‘‘RARs’’) for its fiscal 2001 and 2002 tax years. The  IRS began an audit of HP’s 2006 and  2007
income tax returns in 2009. With respect to major foreign  and state tax jurisdictions, HP  is no  longer
subject  to tax authority examinations for years prior to 1999. HP believes  that  adequate reserves have
been provided for all open tax years.

On July 30, 2009, HP received a Notice  of Deficiency from the IRS  for its  fiscal 2004 and 2005 tax

years. The Notice of Deficiency asserted  that HP owes additional tax  of $92 million and  penalties of
$5 million. In addition to the proposed deficiency  for fiscal 2004 and 2005,  the IRS’s adjustments  for
both years, if sustained, would reduce  the tax benefits  of net operating loss  and tax credit carryforwards
to subsequent years by approximately $563 million. HP plans to contest  certain  of  the adjustments
proposed in the Notice of Deficiency. HP  believes  that it has provided adequate reserves for any  tax
deficiencies or reductions in tax benefits  that could  result  from the IRS actions.

Tax years of EDS through 2002 have been audited  by the  IRS, and  all proposed  adjustments have

been resolved. The IRS is currently auditing  EDS’s tax years 2005 and  2006. On December 5, 2008,
EDS received a RAR for exam years 2003 and 2004, proposing  a tax deficiency of  $82 million. This
deficiency includes a $12 million effect on carrybacks to 2000 and 2001. HP  is appealing  certain  issues
and  believes adequate reserves have  been  provided for all years.

On January 30, 2008, HP received a Notice of Deficiency from  the IRS  for its fiscal 2003  tax year.

The Notice of Deficiency asserted that HP  owes  additional tax of $21 million. At the same  time, HP
received a RAR from the IRS for its fiscal 2002  tax year that  proposed no change  in HP’s tax liability
for that year. In addition to the proposed deficiency for  fiscal  2003, the IRS’s adjustments for both
years, if sustained, would reduce tax refund claims HP has filed  for net  operating loss carrybacks to
earlier  fiscal years and reduce the tax benefits of tax credit carryforwards to subsequent years, by
approximately $249 million. This amount reflects certain transfer pricing adjustments that were settled
during fiscal 2008. HP plans to contest certain remaining adjustments proposed in the  Notice  of
Deficiency and the RAR. Towards this  end, HP filed a petition  with the  United States Tax Court on
April 29, 2008. HP believes that it has  provided  adequate reserves for any tax  deficiencies or  reductions
in refund claims that could result from the IRS actions.

131

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 14:  Taxes on Earnings (Continued)

On June 28, 2007, HP received a Notice of  Deficiency  from the  IRS for  its fiscal 1999 and 2000
tax years. The Notice of Deficiency asserted  that HP  owes  additional  tax of $13 million  for these two
years. At the same time, HP received  a RAR  from  IRS for its fiscal 2001 tax year that proposed no
change  in HP’s tax liability for that year. In addition to the proposed deficiencies for fiscal 1999  and
2000, the IRS’s adjustments, if sustained, would reduce tax refund claims HP  has filed for  foreign tax
credit and net operating loss carrybacks to earlier fiscal years and  reduce the  tax benefits of
carryforwards to subsequent years, by  approximately  $80 million.  HP plans to contest certain of  the
adjustments proposed in the Notice of Deficiency and  the RAR. Towards this end,  HP filed a Petition
with the United States Tax Court on September 25, 2007. HP  believes  that it  has provided adequate
reserves for any tax deficiencies or reductions in  refund claims that could result from the IRS actions.

HP has not provided for U.S. federal  income and foreign withholding taxes  on $16.5  billion of
undistributed earnings from non-U.S.  operations as of October 31,  2009 because HP intends  to  reinvest
such  earnings indefinitely outside of the United States.  If HP  were to distribute these earnings, foreign
tax credits may become available under  current law to reduce the resulting  U.S. income tax liability.
Determination of the amount of unrecognized deferred tax liability related to these  earnings is  not
practicable. HP will remit non-indefinitely reinvested earnings of its non-US subsidiaries for  which
deferred U.S. federal and withholding  taxes have been provided where excess  cash has accumulated  and
it determines that it is advantageous  for business operations,  tax or cash management reasons.

Note 15:  Stockholders’ Equity

Dividends

The stockholders of HP common stock are entitled to receive  dividends when and  as declared by

HP’s Board of Directors. Dividends are paid quarterly.  Dividends  were  $0.32 per common share  in
each of fiscal 2009, 2008 and 2007.

Stock Repurchase Program

HP’s share repurchase program authorizes  both open market and private repurchase transactions.
In fiscal 2009, HP executed share repurchases of 120  million  shares. Repurchases  of  132 million shares
were settled for $5.1 billion, which included 14 million  shares  repurchased  in transactions that were
executed in fiscal 2008 but settled in fiscal  2009. HP had approximately  2 million  shares repurchased  in
the fourth quarter of fiscal 2009 that will  be  settled  in the next fiscal  year. In fiscal 2008,  HP completed
share repurchases of approximately 230 million  shares. Repurchases of approximately 216 million shares
were settled for $9.6 billion, which included approximately 1 million shares  repurchased in  transactions
that were executed in fiscal 2007 but settled in  fiscal 2008. In fiscal  2007, HP completed share
repurchases of approximately 209 million  shares. Repurchases of approximately 210  million  shares were
settled for $9.1 billion, which included approximately 1 million shares  repurchased  in transactions that
were executed in fiscal 2006 but settled in  fiscal 2007. The foregoing shares repurchased and settled in
fiscal 2009, fiscal 2008 and fiscal 2007  were all open market  repurchase transactions.

In addition to the above transactions, HP entered into an  Accelerated  Share Repurchase  (the
‘‘ASR Program’’) with a third-party investment bank during the second quarter of fiscal 2007.  Pursuant
to the terms of the ASR Program, HP purchased  40 million  shares  of  its  common  stock  from the
investment bank for $1.8 billion (the ‘‘Purchase Price’’) on March 30, 2007  (the  ‘‘Purchase Date’’). HP
decreased its  shares outstanding and  reduced the outstanding shares used  to  calculate the weighted-

132

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 15:  Stockholders’ Equity (Continued)

average common shares outstanding for both basic and diluted EPS  on the Purchase  Date. The shares
delivered to HP included shares that the investment bank  borrowed from third parties.  The investment
bank purchased an equivalent number of shares in  the open market to cover  its  position with respect  to
the borrowed shares during a contractually specified averaging period that  began  on the Purchase  Date
and  ended on June 6, 2007. At the end of the averaging period, the investment  bank’s  total purchase
cost based on the volume weighted-average  purchase price of HP shares during the averaging period
was approximately $90 million less than the  Purchase Price. Accordingly,  HP  had the  option to either
receive additional shares of HP’s common stock  or  a cash payment in the  amount  of the difference
from the investment bank. In June 2007, HP received  approximately 2  million additional shares
purchased by the investment bank in  the open market with  a value  approximately equal to that amount.
HP reduced its shares outstanding upon  receipt of those shares.

Also, HP entered into a prepaid variable share purchase program (‘‘PVSPP’’) with a  third-party
investment bank during the first quarter of 2006 and prepaid  approximately  $1.7 billion in exchange  for
the right to receive a variable number of  shares of its common stock weekly over a  one-year period
beginning in the second quarter of fiscal 2006 and ending  during the second quarter of fiscal 2007.
Under the PVSPP, the prices at which HP purchased the  shares  were subject to a minimum and
maximum price that was determined in advance of any repurchases being  completed under the
program, thereby effectively hedging HP’s repurchase price. The minimum  and maximum number  of
shares HP could receive under the program was 52 million shares and 70 million shares,  respectively.
The exact number of shares to be repurchased was based  upon the volume weighted-average  market
price of HP’s shares during each weekly  settlement period, subject to the minimum and  maximum price
as well as regulatory limitations on the number of shares HP was permitted  to  repurchase. HP
decreased its  shares outstanding each settlement period as shares were physically  received. HP
completed all repurchases under the PVSPP on March 9, 2007.  As of that date, HP had cumulatively
received a total of 53 million shares.

In fiscal 2009, there was no additional authorization for future share repurchases by HP’s Board  of
Directors. In fiscal 2008 and fiscal 2007,  HP’s  Board of Directors  authorized  an additional $16.0 billion
and  $8.0 billion for future share repurchases, respectively. As of October 31, 2009,  HP had remaining
authorization of approximately $4.0 billion for future  share repurchases under the $8.0 billion
repurchase authorization approved by HP’s  Board of Directors  on September 19, 2008. On
November 19, 2009, HP’s Board of Directors authorized an  additional  $8.0 billion for future  share
repurchases.

133

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 15:  Stockholders’ Equity (Continued)

Comprehensive Income

The changes in the components of other comprehensive income, net  of taxes, were as follows for

the following fiscal years ended October 31:

Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in unrealized gains/losses  on available-for-sale securities:

Change in net unrealized gains (losses), net of tax of $11 million in fiscal
2009, net of tax benefit of $7 million  in  fiscal 2008 and net of tax of
$2 million in fiscal 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized (gains) losses reclassified into earnings, with no  tax  effect
in fiscal 2009 and fiscal 2008, and net  of tax benefit of  $7 million in
fiscal 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net change in unrealized gains/losses  on cash  flow hedges:

Change in net unrealized (losses) gains, net of tax benefit of $94 million
in fiscal 2009, net of tax of $468 million in  fiscal 2008 and net of tax
benefit of $37 million in fiscal 2007 . . . . . . . . . . . . . . . . . . . . . . . . . .

Net unrealized (gains) losses reclassified into earnings, net  of  tax  of

$468 million in fiscal 2009, net of tax benefit of $34 million in fiscal
2008 and net of tax of $26 million in  fiscal 2007 . . . . . . . . . . . . . . . . .

Net change in cumulative translation adjustment,  net of tax of $227 million
in fiscal 2009, net of tax benefit of $476 million in  fiscal 2008 and net of
tax of $37 million in fiscal 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net change in unrealized components  of defined  benefit plans, net of tax
benefit of $905 million in fiscal 2009,  $42 million in  fiscal  2008 and
$1 million in fiscal 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2009

2008

2007

$ 7,660

In millions
$8,329

$7,264

17

(17)

2

(1)

16

1

(16)

(14)

(12)

(163)

808

(63)

(808)

(971)

58

866

45

(18)

304

(936)

106

(2,531)

(538)

(3)

Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 4,478

$7,705

$7,337

The components of accumulated other comprehensive (loss) income,  net of taxes,  were as follows

for the following fiscal years ended October 31:

Net unrealized gain (loss) on available-for-sale securities . . . . . . . . . . . . . .
Net unrealized (loss) gain on cash flow hedges . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative translation adjustment
Unrealized components of defined benefit plans . . . . . . . . . . . . . . . . . . . .

$

4
(169)
(459)
(2,623)

$ (12) $
802
(763)
(92)

4
(64)
173
446

Accumulated other comprehensive (loss) income . . . . . . . . . . . . . . . . . . . .

$(3,247) $ (65) $ 559

2009

2008

2007

In millions

134

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 16:  Retirement and Post-Retirement Benefit Plans

Acquisition of EDS

On August 26, 2008, EDS became a wholly  owned subsidiary of HP. EDS  sponsors qualified and

non-qualified defined benefit pension plans covering substantially  all of its  employees. The majority of
the EDS defined benefit pension plans are noncontributory. In most  plans, employees become  fully
vested upon attaining two to five years  of service, and benefits are based on many  factors, which  differ
by country, but the most significant is years of service and earnings. The projected unit credit cost
method is used for actuarial purposes. Plan assets  and  plan  obligations associated with the EDS defined
benefit pension plans were included  as of the acquisition date and through  October 31,  2008. On a
global basis, EDS plan assets totaled $7.8 billion  and  plan obligations totaled  $10.1 billion  as of
August 26, 2008. The U.S. portion of  global assets  and obligations totaled  $4.1 billion  and $5.0 billion
respectively.

Defined Benefit Plans

HP sponsors a number of defined benefit pension plans worldwide, of which the most significant
are in the United States. Both the HP Retirement  Plan  (the  ‘‘Retirement Plan’’),  a traditional defined
benefit pension plan based on pay and  years  of  service, and the HP Company  Cash  Account Pension
Plan (the ‘‘Cash Account Pension Plan’’),  under  which benefits are accrued pursuant to a  cash
accumulation account formula based  upon a percentage  of pay  plus interest,  were frozen effective
January 1, 2008. The Cash Account Pension Plan and the Retirement Plan were  merged  in 2005 for
certain funding and investment purposes. The merged  plan is referred  to  as the HP  Pension Plan.

Following the acquisition of EDS, HP announced that  it was modifying the EDS U.S. qualified and

non-qualified plans for employees accruing benefits under the  programs.  Effective January 1, 2009,
EDS employees in the U.S. ceased accruing  pension benefits. The  final  pension benefit amount was
calculated based on pay and service through December 31, 2008.

Effective October 30, 2009, the EDS U.S. qualified pension plan  was  also merged into the  HP

Pension Plan. The EDS U.S. qualified pension plan,  like the Cash Account Pension Plan  and the
Retirement Plan, remains a separate  sub-plan within the  HP Pension Plan for purposes  of determining
benefit amounts. As a result, the merger had no impact on the separate benefit structures of the  plans.

HP reduces the benefit payable to a  U.S. employee  under the Pension  Plan  for service before

1993, if any, by any amounts due to the employee under HP’s frozen defined contribution Deferred
Profit-Sharing Plan (the ‘‘DPSP’’). HP closed the DPSP  to  new  participants in 1993. The DPSP plan
obligations are equal to the plan assets and are recognized  as an  offset to the  Pension Plan when  HP
calculates its defined benefit pension cost  and  obligations. The fair value  of plan  assets and projected

135

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 16:  Retirement and Post-Retirement Benefit Plans  (Continued)

benefit obligations for the U.S. defined benefit plans combined  with the  DPSP is as follows for the
following fiscal years ended October  31:

U.S. defined benefit plans . . . . . . . . . . . . . . . . . . . . . . .
DPSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2009(1)

2008(1)

Projected
Benefit

Projected
Benefit

Plan Assets Obligation

Plan Assets Obligation

$8,371
872

$9,243

In millions

$10,034
872

$10,906

$7,313
910

$8,223

$7,654
910

$8,564

(1)

2009 and 2008 plan assets and projected benefit  obligation include the EDS U.S. pension  plans.

Post-Retirement Benefit Plans

Through fiscal 2005, substantially all of HP’s U.S. employees at December 31, 2002 could become

eligible for partially subsidized retiree medical benefits and retiree life insurance benefits under the
Pre-2003 HP  Retiree Medical Program (the ‘‘Pre-2003 Program’’) and certain other retiree medical
programs. Plan participants in the Pre-2003 Program make contributions based on their choice of
medical option and length of service.  U.S.  employees hired  or rehired on or after January 1, 2003 may
be eligible to participate in a post-retirement medical  plan, the HP Retiree Medical Program, but  must
bear the full cost of their participation.  Effective January 1, 2006, employees whose combination of age
and years of service was less than 62 no  longer  were eligible for the subsidized Pre-2003 Program,  but
instead were eligible for the HP Retiree Medical Program. Employees no longer eligible for the
Pre-2003 Program, as well as employees hired on or after January 1, 2003, are  eligible for  certain
credits under the HP Retirement Medical Savings  Account Plan (‘‘RMSA Plan’’) upon attaining age 45.
Upon retirement, former employees  may  use credits under the RMSA Plan for  the reimbursement of
certain eligible medical expenses, including premiums required for participation in the HP Retiree
Medical Program. In February 2007,  HP  further limited future eligibility for the Pre-2003  HP Retiree
Medical Program to those employees who  were within five years of satisfying the program’s  retirement
criteria on June 30, 2007. Employees not meeting  the modified program criteria may become eligible
for participation in the HP Retiree Medical  Program.  In November 2008, HP  announced that it was
changing  the limits on future cost-sharing for the Pre-2003 Program whereby  all  future cost increases
will be paid by participating retirees starting  in 2011. In  June 2008, HP modified the  RMSA Plan to
provide that generally only those employees who  were employed with HP as of July 31, 2008 would be
eligible to receive  employer credits. In  September 2008, HP further modified  the RMSA Plan to
provide that such employees would receive employer  credits only in the  form of matching  contributions.

Defined Contribution Plans

HP offers various defined contribution plans  for U.S.  and non-U.S. employees. Total defined

contribution expense was $568 million  in fiscal 2009, $548 million in fiscal  2008 and $481 million in
fiscal 2007. U.S. employees are automatically enrolled  in the  Hewlett-Packard Company 401(k)  Plan
(the ‘‘HP 401(k) Plan’’) when they meet eligibility requirements,  unless they decline participation.

136

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 16:  Retirement and Post-Retirement Benefit Plans  (Continued)

Similar to HP, EDS offered participation  in defined contribution plans for U.S.  and non-U.S.
employees.

During fiscal 2008, HP matched employee contributions  to the HP 401(k) Plan with  cash
contributions up to a maximum of 6% of eligible  compensation  for U.S. employees  hired  prior to
August 1, 2008. For U.S. employees hired on or after August 1, 2008  HP matched employee
contributions up to a maximum of 4% of eligible  compensation.

The employer match for the EDS plan was  25% of  the employee contribution  based on  a
maximum contribution of 6% of the  employee’s salary. Effective January  1, 2009, U.S. employees
participating in the EDS 401(k) plan became  eligible for a 4% HP  matching contribution on eligible
compensation. Similar to the HP 401(k) plan, contributions are invested  at the direction of the
employee in various funds, although the  EDS 401(k) plan does  not  offer an HP stock fund.

Effective April 1, 2009, HP matching contributions under both the U.S.  HP 401(k)  Plan and the

EDS 401(k) Plan were changed to a quarterly, discretionary, performance-based match  of up to a
maximum of 4% of eligible compensation for all  U.S.  employees, which  will  be  determined each fiscal
quarter based on business results. HP  matching  contributions will  vary  from 0% to 100% of the
maximum 4% match, based on such  factors as  quarterly earnings, market  share growth, and
performance relative to market and economic  conditions. HP’s matching contributions for  the quarter
ended October 31, 2009 was 100% of the maximum 4% match.

Effective January 31, 2004, HP designated  the HP Stock Fund, an investment  option under the

HP 401(k) Plan, as an Employee Stock Ownership Plan and, as a result, participants in  the HP Stock
Fund may receive dividends in cash or may reinvest  such  dividends  into  the HP Stock  Fund. HP paid
approximately $8 million, $9 million and $9  million in  dividends for the HP  common shares held  by  the
HP Stock Fund in  fiscal 2009, 2008 and 2007, respectively. HP  records the dividends as a  reduction of
retained earnings in the Consolidated Statements of Stockholders’ Equity. The  HP Stock Fund  held
approximately 25 million shares of HP  common  stock at  October 31, 2009.

137

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 16:  Retirement and Post-Retirement Benefit Plans  (Continued)

Pension and Post-Retirement Benefit Expense

HP’s net pension and post-retirement benefit cost (gain)  recognized in  the Consolidated

Statements of Earnings was as follows  for the  following  fiscal  years  ended  October 31:

U.S. Defined
Benefit Plans

Non-U.S. Defined
Benefit Plans

Post-Retirement
Benefit Plans

2009

2008

2007

2009

2008

2007

2009

2008

2007

In millions

Service cost
Interest cost . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . .
Amortization and deferrals:

. . . . . . . . . . . . . . . . . . . . . . $ 27 $ 63 $ 130 $ 312 $ 281 $ 261 $ 14 $ 29 $ 31
77
(38)

366
(579)

619
(669)

475
(713)

296
(318)

260
(355)

592
(533)

70
(32)

78
(40)

Actuarial (gain) loss . . . . . . . . . . . . . . .
(72)
Prior service benefit . . . . . . . . . . . . . . . —

(36)
—

(13)
—

71
(9)

Net periodic benefit cost . . . . . . . . . . . . .

14

5

22

324

1
(8)

36

87
(7)

128

6
(78)

(20)

19
(55)

26
(54)

31

42

. . . . . . . . . . . . —
Curtailment (gain) loss
Settlement (gain) loss . . . . . . . . . . . . .
(1)
Special termination benefits . . . . . . . . . —

— (541)
(1)
8
— 307

5
12
55

— (13)
(2)
4

(2) — (26)
4 — — —
4 — — 60

Net benefit cost (gain) . . . . . . . . . . . . . . $ 13 $

4 $(204) $ 396 $ 38 $ 123 $(22) $ 31 $ 76

In fiscal  2009, HP recognized aggregate pension  curtailment and settlement losses totaling
$5 million and $12 million, respectively,  resulting from workforce  rebalancing initiatives  in several
non-U.S.  countries. In the U.K., workforce rebalancing initiatives triggered pension termination benefits
totaling $55 million. In the U.S., a settlement gain of $1 million was recognized for payout activity
related to non-qualified plans. In Puerto  Rico, a curtailment gain of $2 million was  recognized for the
closure of the retiree medical plan.

The weighted-average assumptions used to calculate  net benefit cost were  as follows for the

following fiscal years ended October  31:

U.S. Defined
Benefit Plans

Non-U.S. Defined
Benefit Plans

Post-Retirement
Benefit Plans

2009

2008

2007

2009

2008

2007

2009

2008

2007

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.0% 6.4% 5.9% 6.0% 5.2% 4.4% 8.2% 6.2% 5.8%
Average increase in compensation levels . . . . . . . 2.0% 3.7% 4.0% 2.6% 3.3% 3.3% — — —
Expected long-term return on assets . . . . . . . . . . 7.5% 6.7% 8.3% 6.9% 6.8% 6.7% 9.3% 8.7% 8.3%

The medical cost and related assumptions used to calculate the net post-retirement benefit cost for

the following fiscal years ended October  31 were as  follows:

Current medical cost trend rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ultimate medical cost trend rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year the medical cost rate reaches ultimate trend rate . . . . . . . . . . . . . . . . . . . .

9.5% 7.5% 8.5%
5.5% 5.5% 5.5%

2013

2010

2010

2009

2008

2007

138

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 16:  Retirement and Post-Retirement Benefit Plans  (Continued)

A 1.0  percentage point increase in the medical cost  trend rate would  have increased the fiscal  2009

service and interest components of the post-retirement benefit  costs  by $0.2  million,  while a
1.0 percentage point decrease would have resulted in  a  decrease  of $0.1 million in  the same period.

Funded Status

The funded status of the defined benefit and post-retirement  benefit plans was as follows for the

following fiscal years ended October  31:

U.S. Defined
Benefit Plans

Non-U.S. Defined
Benefit Plans

Post-Retirement
Benefit Plans

2009

2008

2009

2008

2009

2008

In millions

Change in fair value of plan assets:

Fair value — beginning of year . . . . . . . . .
Addition of plan — EDS . . . . . . . . . . . . .
Acquisition/addition/(deletion) of plans . . .
Actual return on plan assets . . . . . . . . . . .
Employer contributions . . . . . . . . . . . . . .
Participants’ contributions . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
Currency impact

$ 7,313
—
—
1,509
55
—
(488)
(18)
—

$ 4,258
4,090
—
(782)
25
—
(274)
(4)
—

$ 9,507
—
(4)
856
531
84
(449)
(125)
925

$ 9,816
3,749
19
(2,673)
145
84
(302)
(15)
(1,316)

$ 401
—
—
(15)
31
9
(74)
—
—

$ 489
—
—
(56)
52
48
(131)
—
—

Fair value — end of year . . . . . . . . . . . . .

8,371

7,313

11,325

9,507

352

402

Change in benefit obligation:

Projected benefit obligation — beginning

of year . . . . . . . . . . . . . . . . . . . . . . . . .
Addition of plan — EDS . . . . . . . . . . . . .
Acquisition/addition/(deletion) of plans . . .
Impact of change in measurement date . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . .
Participants’ contributions . . . . . . . . . . . . .
Actuarial (gain) loss . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . .
Plan amendments . . . . . . . . . . . . . . . . . . .
Curtailment . . . . . . . . . . . . . . . . . . . . . . .
Settlement . . . . . . . . . . . . . . . . . . . . . . . .
Special termination benefits . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
Currency impact

$ 7,654
—
—
21
27
592
—
2,245
(488)
1
—
(18)
—
—

$ 3,982
4,977
—
—
63
296
—
(1,386)
(274)
—
—
(4)
—
—

$10,468
—
(40)
49
312
619
84
2,106
(449)
(11)
(22)
(125)
55
1,098

$ 8,426
5,105
34
—
281
475
84
(2,197)
(302)
—
—
(15)
4
(1,427)

$1,096
—
(9)
1
14
70
9
60
(74)
(179)
—
—
—
4

$1,323
—
—
—
29
78
48
(243)
(131)
—
—
—
—
(8)

Projected benefit obligation — end of  year . .

10,034

7,654

14,144

10,468

992

1,096

Plan assets less than benefit obligation . . . . .
Contributions after measurement date . . . . .

(1,663)
—

(341)
6

(2,819)
—

(961)
38

(640)
—

(694)
4

Net amount recognized . . . . . . . . . . . . . . . .

$ (1,663) $ (335) $ (2,819) $ (923) $ (640) $ (690)

Accumulated benefit obligation . . . . . . . . . .

$10,031

$ 7,652

$13,217

$ 9,726

139

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 16:  Retirement and Post-Retirement Benefit Plans  (Continued)

The net amounts recognized for HP’s defined benefit and post-retirement benefit plans  in HP’s

Consolidated Balance Sheets as of October 31,  2009 and October  31, 2008 were as follows:

U.S. Defined
Benefit Plans

Non-U.S. Defined
Benefit Plans

Post-Retirement
Benefit Plans

2009

2008

2009

2008

2009

2008

Non-current assets . . . . . . . . . . . . . . . . . . . . .
Current liability . . . . . . . . . . . . . . . . . . . . . . .
Non-current liability . . . . . . . . . . . . . . . . . . . .

$

965
(29)
(2,599)

$

811
(37)
(1,109)

In millions
$

$

101
(38)
(2,882)

748
(48)
(1,623)

$ — $ —
(70)
(620)

(43)
(597)

Net amount recognized . . . . . . . . . . . . . . . . . .

$(1,663) $ (335) $(2,819) $ (923) $(640) $(690)

The following table summarizes the pretax net  experience  loss and prior  service  benefit recognized

in accumulated other comprehensive income for  the company’s defined benefit  and post-retirement
benefit plans as of October 31, 2009.

U.S. Defined
Benefit Plans

Non-U.S. Defined
Benefit Plans

Post-Retirement
Benefit Plans

Net experience loss . . . . . . . . . . . . . . . . . . . . . .
Prior service benefit . . . . . . . . . . . . . . . . . . . . .

$669
—

Total recognized in accumulated other

In millions
$3,275
(95)

$ 146
(503)

comprehensive loss . . . . . . . . . . . . . . . . . . . .

$669

$3,180

$(357)

The following table summarizes the experience loss  and  prior service benefit that will be amortized

from accumulated other comprehensive  income and recognized as components  of net periodic benefit
cost (credit) during the next fiscal year.

U.S. Defined
Benefit Plans

Non-U.S. Defined
Benefit Plans

Post-Retirement
Benefit Plans

Net experience loss . . . . . . . . . . . . . . . . . . . . . .
Prior service benefit . . . . . . . . . . . . . . . . . . . . .

Total to be recognized in accumulated other

comprehensive (income) loss . . . . . . . . . . . . .

$27
—

$27

In millions
$226
(10)

$216

$ 21
(80)

$(59)

140

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 16:  Retirement and Post-Retirement Benefit Plans  (Continued)

The weighted-average assumptions used to calculate the benefit obligation disclosed as of  the 2009

and  2008 fiscal close were as follows:

U.S. Defined
Benefit Plans

Non-U.S.
Defined
Benefit Plans

Post-Retirement
Benefit Plans

2009

2008

2009

2008

2009

2008

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average increase in compensation levels . . . . . . . . . .
Current medical cost trend rate . . . . . . . . . . . . . . . .
Ultimate medical cost trend rate . . . . . . . . . . . . . . .
Year the rate reaches ultimate trend rate . . . . . . . . .

5.9% 8.0% 5.0% 6.0%
2.0% 2.0% 2.5% 2.6%
—
—
—

—
—
—

—
—
—

—
—
—

5.4%
—
—
—
—

7.8%
—
9.5%
5.5%

2013

Stemming from the plan changes announced in November 2008, the employer  subsidy for  the U.S.

retiree  medical plans will ‘‘freeze’’ in fiscal  2010. Therefore, trend rates for 2010 and beyond are  no
longer relevant to the liability calculation  since the excess cost will be picked up  by  retirees.

A 1.0 percentage point increase in the medical cost  trend rate would  have increased the total
post-retirement benefit obligation reported at October  31, 2009 by $3 million, while  a 1.0 percentage
point decrease would have resulted in  a decrease of $3 million.

Defined benefit plans with projected benefit obligations exceeding the  fair value of plan  assets

were as follows:

U.S. Defined
Benefit Plans

Non-U.S.
Defined
Benefit Plans

2009

2008

2009

2008

In millions

Aggregate fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . .
Aggregate projected benefit obligation . . . . . . . . . . . . . . . . . . . . .

$3,516
$6,144

$3,178
$4,330

$ 9,247
$12,167

$4,076
$5,782

Defined benefit plans with accumulated benefit obligations exceeding the  fair value  of plan assets

were as follows:

Aggregate fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . .
Aggregate accumulated benefit obligation . . . . . . . . . . . . . . . . . . .

$3,515
$6,141

$3,178
$4,328

$7,040
$9,263

$3,710
$4,962

U.S. Defined
Benefit Plans

Non-U.S.
Defined
Benefit Plans

2009

2008

2009

2008

In millions

141

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 16:  Retirement and Post-Retirement Benefit Plans  (Continued)

Plan Asset Allocations

The weighted-average target and actual asset allocations across  the  HP and EDS plans at the

respective measurement dates were as follows:

Asset  Category

Public equity securities . . . . . .
Private equity securities . . . . .
Real estate and other . . . . . . .

U. S. Defined
Benefit Plans

Non-U.S. Defined
Benefit Plans

Post-Retirement
Benefit Plans

2009
Target
Allocation

Plan Assets

2009

2008

2009
Target
Allocation

Plan Assets

2009

2008

2009
Target
Allocation

Plan Assets

2009

2008

29.3% 27.1%
10.9% 14.6%
0.3% 0.5%

61.6% 59.5%

—
4.2% 6.2%

—

36.5% 49.5%
33.5% 22.9%
1.3% 2.1%

Equity-related  investments . . .
Public debt securities . . . . . . .
Cash . . . . . . . . . . . . . . . . . .

40.0% 40.5% 42.2% 65.5% 65.8% 65.7% 71.5% 71.3% 74.5%
60.0% 58.7% 56.7% 34.5% 32.9% 33.4% 27.5% 25.9% 23.6%
0.0% 0.8% 1.1% 0.0% 1.3% 0.9% 1.0% 2.8% 1.9%

Total . . . . . . . . . . . . . . . . .

100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Investment Policy

HP’s investment strategy for worldwide plan  assets is to seek a competitive rate  of return relative
to an appropriate level of risk depending  on the funded status of each  plan. The majority of the plans’
investment managers employ active investment  management strategies with  the goal of outperforming
the broad markets in which they invest.  Risk  management practices include  diversification  across asset
classes and investment styles and periodic  rebalancing toward asset allocation  targets. A number of the
plans’ investment managers are authorized to utilize derivatives for investment or  liability  exposures,
and HP utilizes derivatives to effect asset allocation changes  or  to  hedge certain  investment or liability
exposures.

The target asset allocation selected for each  U.S. plan reflects  a  risk/return profile HP feels is
appropriate relative to each plan’s liability structure and  return goals.  HP conducts periodic asset-
liability studies for U.S. plan assets in  order to model various potential asset allocations in  comparison
to each plan’s forecasted liabilities and liquidity needs. HP invests a portion of  the U.S.  defined benefit
plan  assets and post-retirement benefit  plan assets in  private market securities such as venture capital
funds,  private debt and private equity  to  provide diversification  and  higher expected  returns.

Outside the United States, asset allocation  decisions are typically made by an independent board

of trustees. As in the U.S., investment  objectives  are aligned  to  generate returns  that  will enable  the
plan  to meet its future obligations. In some countries local  regulations require adjustments in  asset
allocation, typically leading to a higher percentage in fixed income than would otherwise be deployed.
HP’s corporate office acts in a consulting  and governance role in reviewing investment strategy and
providing a recommended list of investment managers for  each country plan,  with final decisions on
asset allocation and investment managers  made by local  trustees.

Basis for Expected Long-Term Rate of Return on  Plan Assets

The expected long-term rate of return on  assets for each U.S.  plan  reflects the expected returns
for each  major asset class in which the  plan invests and the weight of each asset class in the  target  mix.

142

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 16:  Retirement and Post-Retirement Benefit Plans  (Continued)

Expected asset class returns reflect the  current yield on U.S. government bonds and risk premiums  for
each asset class. Because HP’s investment policy is to employ primarily active investment managers who
seek to outperform the broader market,  the asset class expected returns  are adjusted  to  reflect  the
expected additional returns net of fees.

HP closed the acquisition of EDS on August 26,  2008. Effective with the  close of fiscal 2009,  HP
has merged the assets of the HP and EDS US pension plans after conducting an asset  allocation  study
for the combined plan. The expected return on  the plan assets, used in calculating the net benefit costs,
is 8% for fiscal 2010, which reflects the result of the most recent asset allocation study and is
commensurate with the investment strategy  for the merged U.S. pension  plan.

The approach used to arrive at the expected rate of return on  assets for the non-U.S. plans  reflects

the asset allocation policy of each plan and the expected country real  returns for  equity and  fixed
income investments. On an annual basis, HP  gathers empirical data from the  local country subsidiaries
to determine expected long-term rates of return  for equity and fixed income  securities. HP  then weights
these expected real rates of return based on country specific allocation mixes  adjusted for inflation.

Future Contributions and Funding Policy

In fiscal 2010, HP expects to contribute approximately $745 million to its pension  plans and

approximately $30 million to cover benefit payments  to  U.S. non-qualified plan participants. HP expects
to pay approximately $45 million to cover benefit claims for HP’s  post-retirement  benefit plans. HP’s
funding policy is to contribute cash to  its pension plans so that it meets at least the  minimum
contribution requirements, as established  by local government, funding and taxing  authorities.

Estimated Future Benefits Payable

HP estimates that  the future benefits payable for the retirement  and  post-retirement  plans in place

were as follows at October 31, 2009:

U.S. Defined
Benefit Plans

Non-U.S. Defined
Benefit Plans

Post-Retirement
Benefit  Plans(1)

Fiscal year ending October 31

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Next five fiscal years to October 31, 2019 . . . . . . . . . . . .

$ 453
$ 474
$ 519
$ 556
$ 470
$2,858

In millions

$ 363
$ 368
$ 398
$ 435
$ 478
$3,120

$ 92
$ 93
$ 90
$ 88
$ 86
$414

(1) The estimated future benefits payable for the post-retirement plans  are  reflected  net of the

expected Medicare Part D subsidy.

Note 17: Commitments

HP leases certain real and personal property under  non-cancelable operating leases. Certain leases
require HP to pay property taxes, insurance and routine maintenance and include renewal options and

143

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 17:  Commitments (Continued)

escalation clauses. Rent expense was approximately $1,112 million in fiscal 2009,  $935 million in fiscal
2008 and $767 million in fiscal 2007.  The  increase in fiscal 2009 rent  expense was primarily a result of
the EDS acquisition in August 2008. Sublease rental income  was approximately $53 million in  fiscal
2009, $37 million in fiscal 2008 and $44 million  in fiscal 2007.

At October 31, 2009, property under capital lease which  was  comprised primarily of equipment and

furniture was approximately $723 million and was included in property, plant and equipment  in the
accompanying Consolidated Balance Sheet. Accumulated  depreciation  on the property  under capital
lease was approximately $406 million  at  October 31, 2009. The related depreciation is included in
depreciation expense.

Future annual minimum lease payments,  sublease rental income  commitments and capital lease

commitments at October 31, 2009 were as follows:

2010

2011

2012

2013

2014

Thereafter

Total

Minimum lease payments . . . . . . . . . . . . . . . .
Less: Sublease rental income . . . . . . . . . . . . .

$988
(39)

$779
(29)

$519
(25)

In millions
$365
(20)

$265
(13)

$949

$750

$494

$345

$252

Capital lease commitments . . . . . . . . . . . . . . .
Less: Interest payments . . . . . . . . . . . . . . . . .

$134
(18)

$ 82
(11)

$ 60
(7)

$ 39
(4)

$ 23
(3)

$116

$ 71

$ 53

$ 35

$ 20

$637
(15)

$622

$230
(2)

$228

$3,553
(141)

$3,412

$ 568
(45)

$ 523

At October 31, 2009, HP had unconditional purchase obligations of  approximately  $2.0 billion.
These unconditional purchase obligations  include  agreements  to  purchase goods or  services that are
enforceable and legally binding on HP and that  specify  all  significant terms, including  fixed  or
minimum quantities to be purchased,  fixed,  minimum or variable  price provisions and the approximate
timing of  the transaction. Unconditional purchase  obligations exclude agreements that are  cancelable
without penalty. These unconditional  purchase obligations are related principally to inventory and  other
items. Future unconditional purchase  obligations at  October 31, 2009 were as follows:

Unconditional purchase obligations . . . . . . . . . . . . . . .

$1,775

$118

In millions
$15

$106

$16

$3

2010

2011

2012

2013

2014

Thereafter

Note 18: Litigation and Contingencies

HP is involved in lawsuits, claims, investigations and proceedings, including those identified below,

consisting of intellectual property, commercial,  securities, employment,  employee benefits  and
environmental matters that arise in the ordinary course of business. HP records a provision for  a
liability when management believes that it is  both  probable that a liability has been incurred and  the
amount of the loss can be reasonably  estimated.  HP believes it  has adequate provisions for any  such
matters. HP reviews these provisions at least  quarterly and adjusts these provisions to reflect the  impact
of negotiations, settlements, rulings,  advice of legal counsel, and other information and events
pertaining to a particular case. Based on  its experience, HP  believes  that any damage amounts claimed
in the specific matters discussed below  are not a  meaningful  indicator  of  HP’s  potential liability.

144

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 18:  Litigation and Contingencies (Continued)

Litigation is inherently unpredictable. However, HP believes that  it has  valid defenses with respect to
legal matters pending against it. Nevertheless, it is  possible that cash flows or results of operations
could be materially affected in any particular  period  by the unfavorable  resolution of  one  or more of
these contingencies or because of the diversion  of management’s attention  and the  creation of
significant expenses.

Litigation, Proceedings and Investigations

Copyright levies. As described below, proceedings are  ongoing  against HP in certain European

Union  (‘‘EU’’) member countries, including litigation  in  Germany, seeking to impose levies upon
equipment (such as multifunction devices  (‘‘MFDs’’), personal computers (‘‘PCs’’) and  printers) and
alleging  that these devices enable producing private copies of copyrighted materials.  The total levies
due, if imposed, would be based upon  the number  of  products  sold  and the per-product amounts  of the
levies, which vary. Some EU member  countries that do not yet have levies on  digital  devices are
expected to implement similar legislation to enable them  to extend  existing levy  schemes, while  some
other EU member countries are expected  to  limit the scope of levy schemes and applicability in the
digital hardware environment. HP, other companies and various industry associations  are opposing the
extension of levies to the digital environment and advocating alternative models of  compensation to
rights holders.

VerwertungsGesellschaft Wort (‘‘VG Wort’’), a collection  agency representing certain copyright
holders, instituted non-binding arbitration proceedings against HP in June 2001 in Germany before the
arbitration board of the Patent and Trademark Office. The proceedings relate to whether and to what
extent copyright levies for photocopiers should be imposed in accordance with copyright laws
implemented in Germany on MFDs that allegedly enable the  production of  copies by private persons.
Following unsuccessful arbitration, VG Wort filed a  lawsuit against  HP in May 2004 in the Stuttgart
Civil Court in Stuttgart, Germany seeking levies  on certain MFDs sold from 1997 to 2001. On
December 22, 2004, the court held that HP is liable for payments  regarding MFDs sold in Germany,
and ordered HP to pay VG Wort an  amount equal to 5% of the outstanding  levies claimed, plus
interest, on MFDs sold in Germany up to December  2001.  VG  Wort appealed this decision. On July 6,
2005, the Stuttgart Court of Appeals  ordered HP to pay  VG Wort levies based on the published tariffs
for photocopiers in Germany (which range from EUR 38.35 to EUR 613.56 per unit), plus interest, on
MFDs sold in Germany up to December  2001. HP appealed the Stuttgart Court  of Appeals’  decision to
the Bundesgerichtshof (the German Federal Supreme Court). On  January 30, 2008, the German
Federal Supreme Court held  that the MFDs covered by this lawsuit were photocopiers within the
meaning of the German copyright law that was in effect until  December 31, 2007, and, therefore, are
subject to the levies on photocopiers  established by  that law. HP subsequently appealed the decision by
filing a claim with the German Federal  Constitutional Court challenging that ruling and the application
of conventional photocopier levies for  MFDs sold in  Germany up to December 2001. On June 4, 2009,
the German Constitutional Court declined to hear HP’s  appeal.

On September 26,  2005, VG Wort filed an  additional lawsuit against HP in the Stuttgart Civil

Court in Stuttgart, Germany seeking  assurance  of  full payment  of levies on MFD units  sold in
Germany between 1997 and 2001, as well  as for MFDs sold from 2002  onwards. On July 26, 2007, the
court issued a decision following the ruling of  the Stuttgart Court of Appeals with respect  to  the initial
VG Wort lawsuit as described above.  HP  appealed the  decision. On March 25,  2009, the German
Association for Information Technology,  Telecommunications and New Media  e.V.  entered into a

145

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 18:  Litigation and Contingencies (Continued)

settlement agreement with VG Wort and  Verwertungsgesellschaft Bild-Kunst, another collection  agency
representing copyright holders (‘‘VG Bild-Kunst’’), that provides for the  payment of levies on MFDs
sold from 2002 through 2007. The levies  vary  from  approximately A13  to  A307 per unit depending on
the type  of device, the date sold and the copy speed and  are subject  to  reduction  if VG Wort or VG
Bild-Kunst grants more favorable rates in  the future  to  parties  within Germany  that  are not covered  by
the settlement. HP has acceded to the settlement and paid all  amounts due thereunder.

In July 2004, VG Wort filed a separate lawsuit against  HP in the Stuttgart  Civil Court  seeking
levies  on printers. On December 22, 2004, the court held  that HP is liable for payments  regarding all
printers using ASCII code sold in Germany  but  did not determine the amount payable per unit. HP
appealed  this decision in January 2005  to  the Stuttgart  Court of Appeals. On May 11, 2005,  the
Stuttgart Court of Appeals issued a decision confirming that levies are due. On June  6, 2005, HP filed
an appeal to the German Federal Supreme Court in Karlsruhe. On December 6, 2007, the German
Federal  Supreme Court issued a judgment that printers are not subject  to  levies  under the existing law.
The court issued a written decision on January 25, 2008,  and VG Wort  subsequently filed an
application with the German Federal Supreme Court under Section 321a  of  the German Code of Civil
Procedure contending that the court did not consider  their arguments. On May  9, 2008, the  German
Federal  Supreme Court denied VG Wort’s application. In addition, VG Wort has appealed the decision
by filing a claim with the German Federal  Constitutional Court challenging the  ruling that printers are
not subject to levies. HP and the industry  association  BITKOM have  responded to VG Wort’s claim.

In September 2003, VG Wort filed a  lawsuit against  Fujitsu  Siemens Computer GmbH (‘‘FSC’’)  in

the Munich Civil Court in Munich, Germany seeking levies on  PCs. This is  an industry test  case in
Germany, and HP has agreed not to object to the delay  if VG Wort sues HP for  such levies on  PCs
following a final decision against FSC. On December 23,  2004,  the Munich  Civil Court  held that PCs
are subject to a levy and that FSC must pay 12  euros  plus compound interest for each PC  sold in
Germany since March 2001. FSC appealed this decision in January 2005 to the Munich Court  of
Appeals. On December 15, 2005, the Munich Court of Appeals affirmed the  Munich Civil Court
decision. FSC filed an appeal with the German Federal Supreme Court in  February  2006. On
October  2, 2008, the German Federal Supreme Court  issued a  judgment that PCs were not
photocopiers within the meaning of the German copyright law  that was in effect until  December 31,
2007 and, therefore, not subject to the levies on photocopiers established by that law.  VG Wort has
filed  a claim with the German Federal  Constitutional Court challenging that ruling. FSC and BITKOM
have  responded to VG Wort’s claim.

On December 29, 2005, ZPU, a joint association of various German collection societies, instituted

non-binding arbitration proceedings against HP  before  the arbitration board of the Patent and
Trademark Office demanding reporting of every  PC sold by HP  in Germany  from January 2002 through
December 2005 and seeking a levy of 18.42 euros plus  tax for  each PC  sold during that period.  HP
filed  a notice of defense in connection with these proceedings in February  2006, and  an arbitration
hearing was held in December 2006. On July 31, 2007,  the arbitration board issued a ruling proposing a
levy  of  15 euros plus tax for each PC sold during that period. HP has rejected the ruling  of the
arbitration board, and the arbitration proceedings  have concluded. ZPU has filed a claim with the
Munich Court of Appeals to which HP has responded. A hearing date  has been  set by the court for
February 18, 2010.

146

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 18:  Litigation and Contingencies (Continued)

Based on industry opposition to the  extension of  levies to digital  products,  HP’s  assessments of  the

merits of various proceedings and HP’s estimates  of  the units  impacted and  levies, HP has accrued
amounts that it believes are adequate to address the matters  described above.  However, the  ultimate
resolution of these matters and the associated financial  impact on  HP, including  the number  of  units
impacted, the amount of levies imposed  and the ability  of HP to recover such amounts through
increased prices, remains uncertain.

Sky Subscribers Services Limited and British Sky Broadcasting  Limited v. EDS  and EDS Limited  (UK)

is a lawsuit filed on August 17, 2004 by Sky Subscribers Services  Limited and  British Sky Broadcasting
Limited against Electronic Data Systems Corporation  (‘‘EDS’’), a  company that HP acquired in  August
2008, and EDS Limited (UK) (‘‘EDS UK’’),  one of  EDS’s subsidiaries, alleging  deceit, negligent
misrepresentation, negligent misstatement and breach of contract. The claims arose out  of  a customer
relationship management project that  was awarded  to  EDS in  2000, the principal objective of which
was to develop a customer call center  in Scotland.  EDS’s main  role in  the project was as systems
integrator. On November 12, 2004, EDS  and  EDS  UK filed  their  defense and  counterclaim denying the
claims and seeking damages for monies owed under the  contract. The trial of this action  commenced
on October 15, 2007, and final arguments concluded on  July  30, 2008. At trial, the plaintiffs claimed
damages in excess of £700 million, and  EDS  and  EDS  UK counterclaimed for damages of
approximately £5 million. HP expects to receive a decision  from the court in January  2010.

Skold, et al. v. Intel Corporation and Hewlett-Packard  Company is a lawsuit in which HP was joined

on June 14, 2004 that is pending in state court in Santa Clara County, California. The  lawsuit  alleges
that HP (along with Intel) misled the public by suppressing and concealing the alleged  material  fact
that systems that use the Intel Pentium  4 processor are less powerful and slower than systems  using the
Intel Pentium III processor and processors made by a  competitor of Intel. The plaintiffs seek
unspecified damages, restitution, attorneys’ fees and costs, and certification of a nationwide class.  On
February 27, 2009, the court denied with  prejudice plaintiffs’ motion for nationwide class certification
for a third time. The plaintiffs have appealed  the court’s  decision.

Inkjet Printer Litigation. As described below, HP is involved in several  lawsuits  claiming breach of

express and implied warranty, unjust  enrichment, deceptive advertising and unfair business practices
where  the plaintiffs have alleged, among other things, that HP employed  a ‘‘smart chip’’ in certain
inkjet printing products in order to register  ink depletion  prematurely  and to render  the cartridge
unusable through a built-in expiration date  that is hidden, not documented in marketing  materials to
consumers, or both. The plaintiffs have also contended that consumers  received  false ink depletion
warnings and that the smart chip limits the ability of  consumers to use the cartridge to its full capacity
or to choose competitive products.

(cid:129) A consolidated lawsuit captioned In re HP Inkjet  Printer Litigation  is pending in the United

States District Court for the Northern District of California where the plaintiffs  are seeking class
certification, restitution, damages (including enhanced  damages),  injunctive  relief, interest, costs,
and attorneys’ fees. On January 4, 2008, the court heard plaintiffs’ motions for class  certification
and to add a class representative and HP’s motion for  summary  judgment. On July  25, 2008, the
court denied all three motions. On March 30, 2009,  the plaintiffs filed  a renewed motion  for
class certification. A hearing on the plaintiffs’ motion for class certification is scheduled for
January 8, 2010.

147

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 18:  Litigation and Contingencies (Continued)

(cid:129) A lawsuit captioned Blennis v. HP was filed on  January 17, 2007  in the  United States District

Court for the Northern District of California  where the  plaintiffs  are  seeking class certification,
restitution, damages (including enhanced damages), injunctive relief, interest, costs, and
attorneys’ fees. A class certification hearing is scheduled for April 23,  2010.

(cid:129) Four class actions against HP and its subsidiary, Hewlett-Packard (Canada)  Co.,  are pending in
Canada, one commenced in British Columbia in February 2006,  two commenced in Quebec in
April 2006 and May 2006, respectively, and one commenced in Ontario in June 2006,  where the
plaintiffs are seeking class certification, restitution, declaratory relief, injunctive  relief and
unspecified statutory, compensatory and punitive  damages.  A class  authorization hearing  for one
of the cases pending in Quebec was tentatively scheduled for December 10, 2009; that hearing
has been postponed and no new date  has been set by  the court.

Baggett v. HP is a consumer class action  filed against HP on  June  6, 2007 in  the United  States

District Court for the Central District of  California alleging  that HP employs  a technology in its
LaserJet color printers whereby the printing  process shuts down prematurely, thus preventing  customers
from using the toner that is allegedly left  in the  cartridge. The  plaintiffs  also allege that HP fails  to
disclose to consumers that they will be unable to utilize the toner remaining in the  cartridge after the
printer shuts down. The complaint seeks  certification of a nationwide class  of  purchasers of  all  HP
LaserJet color printers and seeks unspecified damages, restitution, disgorgement, injunctive  relief,
attorneys’ fees and costs. On September 29, 2009, the court granted HP’s motion for  summary
judgment against the named plaintiff and denied plaintiff’s motion for class certification as moot.  On
November 3, 2009, the court entered judgment against the named plaintiff.  On November  17, 2009,
plaintiff  filed an appeal of the court’s  summary  judgment  ruling with the  United States Court of
Appeals for the Ninth Circuit.

Rich v. HP is a consumer class action filed against HP on May 22, 2006 in the United States
District Court for the Northern District  of California.  The suit alleges that HP designed  its  color inkjet
printers to unnecessarily use color ink in addition  to  black ink when printing black and white images
and  text. The plaintiffs are seeking to  certify  a nationwide injunctive  class and a California-only
damages class. A class certification hearing is  scheduled  for February 5, 2010.

On December 27, 2001, Cornell University and  the Cornell  Research Foundation, Inc. filed a
complaint, amended on September 6, 2002,  against HP in  United States District Court  for the
Northern District of New York alleging  that HP’s PA-RISC  8000 family  of microprocessors, and servers
and  workstations incorporating those processors, infringe a patent  assigned to Cornell Research
Foundation, Inc. that describes a way  of  executing microprocessor instructions. The complaint sought
declaratory and injunctive relief and  unspecified damages. The patent at issue in this  litigation, United
States Patent No. 4,807,115, expired on February  21, 2006. Therefore, the plaintiffs are no longer
entitled to seek injunctive relief against HP. This matter was tried  between  May 19  and May 30,  2008,
and, on May 30, 2008, a jury returned  a  verdict in  favor of the plaintiffs in  the amount of $184 million.
On March 30, 2009, the trial court issued  four  post-trial decisions. The court denied several of HP’s
post-trial motions, but granted HP’s motion to reduce the damages award. The court  reduced  the
award to approximately $53 million and  subsequently  entered judgment in  favor  of the plaintiffs in  that
amount. On April 10, 2009, HP filed  a notice  that it  will appeal the judgment to the United States
Court of Appeals for the Federal Circuit. On May 15,  2009,  the  court  awarded approximately
$17 million in pre-judgment interest and  approximately $1 million in costs and subsequently  entered an

148

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 18:  Litigation and Contingencies (Continued)

amended judgment reflecting those awards. On June 2, 2009, the court entered  a final amended
judgment reflecting the total amount of damages, pre-judgment interest and  taxable costs. On June  4,
2009, HP filed an amended notice of appeal.

Fair Labor Standards Act Litigation. As described below, HP is involved in several  lawsuits  in
which  the plaintiffs are seeking unpaid overtime compensation and other damages  based on allegations
that various employees of EDS or HP  have  been misclassified  as exempt employees under the Fair
Labor Standards Act and/or in violation of the California Labor Code or other state laws:

(cid:129) Cunningham and Cunningham, et al. v.  Electronic Data Systems Corporation is a  purported

collective action filed on May 10, 2006  in the U.S. District Court for the Southern District of
New York claiming that current and former  EDS employees involved in installing and/or
maintaining computer software and hardware  were misclassified as exempt employees. Two other
purported collective actions, Steavens, et  al. v.  Electronic Data Systems Corporation, which was
filed on October 23, 2007, and Azar v. Electronic Data Systems Corporation, which  was filed on
February 20, 2009, are also now pending in the same court alleging similar facts.

(cid:129) Heffelfinger, et al. v. Electronic Data Systems Corporation  is a class action filed on November 2006

in California Superior Court claiming that  certain EDS information technology workers in
California were misclassified exempt  employees. The  case was subsequently  transferred to the
U.S. District Court for the Central District  of  California, which, on January 7, 2008, certified a
class of information technology workers in California. On June 6, 2008, the court  granted the
defendant’s motion for summary judgment. The plaintiffs subsequently filed an appeal with the
U.S. Court of Appeals for the Ninth Circuit. Three other purported class actions  originally filed
in California Superior Court, Jameson, et al. v. Electronic Data Systems Corporation, which  was
filed on July 16, 2008, Karlbom, et al.  v.  Electronic  Data  Systems Corporation, which was filed on
March 16, 2009, and George,  et al. v. Electronic Data Systems Corporation,  which was filed on
April 2, 2009, are pending in the U.S. District Court for  the Central or Southern District of
California alleging similar facts.

(cid:129) Mathias v. Hewlett-Packard Company is a purported collective action filed on August 21, 2009 in
the United States District Court for the  Northern District of Georgia, Atlanta Division.  The
lawsuit alleges that Mathias represents other similarly  situated employees who were misclassified
as exempt employees.

The United States of America, ex rel. Norman Rille and Neal Roberts v. Hewlett-Packard Company,

In 2004, two private individuals filed  a civil ‘‘qui tam’’ complaint under the False Claims  Act in

et al.
the United States District Court for the  Eastern  District  of Arkansas containing generalized  allegations
that HP and several other companies  participated in an industry-wide practice of using partnership and
alliance programs to make improper  payments and cause the  submission  of false claims in connection
with contracts to provide products and services  to  the federal government. On April 12, 2007,  the U.S.
Department of Justice intervened in  the  qui tam action and filed a  complaint  against HP  (and several
other companies in separate actions)  on  behalf  of  the United States containing allegations that HP
violated the False Claims Act and the Anti-Kickback Act of  1986 by providing millions of dollars in
kickbacks to its alliance partners, including ‘‘influencer  fees’’ and ‘‘new business opportunity rebates.’’
The U.S. complaint further alleges that  HP violated the  False Claims Act and the Anti-Kickback Act,
breached its federal government contracts, induced  the federal government to make payments to HP

149

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 18:  Litigation and Contingencies (Continued)

that HP was not entitled to receive under those  contracts, and was unjustly  enriched  by  expressly or
impliedly making false statements, records  or  certifications  to  the  federal  government that it complied
with and  would continue to comply with the Anti-Kickback Act and  by submitting  claims to the
government that allegedly were inflated because they included the amounts of the  influencer fees and
new business  opportunity rebates. The U.S.  complaint seeks treble  damages plus civil penalties in
connection with the alleged violations of  the False Claims Act, double  damages plus civil penalties in
connection with the alleged violations of  the Anti-Kickback Act  and disgorgement of profits  earned in
connection with the breach of contract and unjust enrichment claims.

Leak  Investigation Proceedings. As described below, HP is or has been the subject of various

governmental inquiries concerning the processes employed  in an  investigation into leaks of  HP
confidential information to members of the media that  concluded in May 2006:

(cid:129) In  August 2006, HP was informally  contacted  by the Attorney  General of the  State  of California

requesting information concerning the  processes employed in  the leak investigation.  On
December 7, 2006, HP announced that it entered into an  agreement with  the California
Attorney General to resolve civil claims arising from the  leak investigation,  including a  claim
made by the California Attorney General in a  Santa Clara County Superior  Court action  filed
on December 7, 2006, that HP committed unfair business practices under  California  law in
connection with the leak investigation. As  a result of  this agreement,  which includes  an
injunction, the California Attorney General will not pursue civil claims against  HP or its current
and former directors, officers and employees. Under the terms  of the agreement,  HP paid a
total of $14.5 million and agreed to implement and maintain for five years a  series of measures
designed to ensure that HP’s corporate investigations  are conducted in accordance with
California law and the company’s high  ethical standards. Of  the  $14.5 million, $13.5 million has
been used to create a Privacy and Piracy Fund to assist California  prosecutors in investigating
and prosecuting consumer privacy and information piracy violations,  $650,000 was used  to  pay
statutory damages and $350,000 reimbursed the  California Attorney  General’s office for  its
investigation costs. There was no finding of liability against  HP as part of the settlement.

(cid:129) Beginning in September 2006, HP  received requests from the  Committee on Energy and

Commerce of the U.S. House of Representatives (the ‘‘Committee’’) for records  and information
concerning the leak investigation, securities transactions  by HP  officers and directors, including
an August 25, 2006, securities transaction by Mark Hurd,  HP’s Chairman  and Chief Executive
Officer, and related matters. HP has responded to those requests. In addition, Mr. Hurd
voluntarily gave testimony to the Committee regarding  the leak investigation on September 28,
2006.

(cid:129) In  September 2006, HP was informally contacted by the  U.S.  Attorney  for  the Northern  District

of California requesting similar information concerning the processes employed in the  leak
investigation. HP has responded to that request.

(cid:129) Beginning in September 2006, HP  has received requests  from  the Division  of  Enforcement  of
the Securities and Exchange Commission for records  and  information and interviews with
current and former HP directors and officers relating  to  the leak investigation,  the resignation of
Thomas J. Perkins from HP’s Board of Directors, HP’s May 22, 2006 and September  6, 2006
filings with the SEC on Form 8-K, stock repurchases by  HP and securities transactions  by  its

150

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 18:  Litigation and Contingencies (Continued)

officers and directors that occurred between  May  1 and October  1, 2006,  and HP’s policies,
practices  and approval of securities transactions. In  May  2007,  HP consented to the entry of  an
order by the SEC ordering HP to cease and desist from committing or causing  violations of the
public reporting requirements of the Securities Exchange Act  of 1934, as amended.  HP has been
advised by the staff of the Division of  Enforcement  that the staff has completed its investigation
and  does not intend to recommend that any other SEC  enforcement action  be  brought in
connection with these matters.

(cid:129) In September 2006, HP received a request from the U.S. Federal Communications Commission
for records and information relating to the processes employed in  the leak investigation. HP has
responded to that request.

In addition, four stockholder derivative  lawsuits have  been  filed in California purportedly on  behalf

of HP stockholders seeking to recover damages for  alleged breach  of fiduciary duty and to require HP
to improve its corporate governance and internal  control procedures  as a result of the activities  of the
leak investigation: Staehr v. Dunn, et al.  was  filed in Santa Clara County Superior  Court on
September 18, 2006; Worsham v. Dunn, et al. was filed  in Santa Clara County  Superior  Court
on September 14, 2006; Tansey v. Dunn, et  al.  was filed in Santa Clara County Superior Court on
September 20, 2006; and Hall v. Dunn, et al. was  filed in  Santa Clara County  Superior  Court on
September 25, 2006. On October 19,  2006, the Santa Clara County Superior  Court consolidated the
four California cases under the caption  In re Hewlett-Packard Company  Derivative  Litigation.  The
consolidated complaint filed on November 19,  2006, also seeks to recover damages  in connection  with
sales of HP stock alleged to have been made by  certain current and  former HP  officers and  directors
while in possession of material non-public  information. Two  additional  stockholder derivative lawsuits,
Pifko v. Babbio, et al., filed on September 19, 2006, and Gross v. Babbio,  et al., filed  on November  21,
2006, were filed in Chancery Court, County of New Castle, Delaware; both seek to recover damages  for
alleged breaches of fiduciary duty and to obtain an  order instructing  the defendants to refrain  from
further breaches of fiduciary duty and to implement corrective measures that will prevent  future
occurrences of the alleged breaches of fiduciary  duty. On  January 24, 2007, the  Delaware court
consolidated the two cases under the  caption In re  Hewlett-Packard Company Derivative Litigation and
subsequently stayed the proceedings, as the parties had reached  a tentative settlement.  The HP Board
of Directors appointed a Special Litigation  Committee consisting of independent Board members
authorized to investigate, review and evaluate the facts  and circumstances asserted in these derivative
matters and to determine how HP should  proceed in  these matters. On  December 14, 2007, HP  and
the plaintiffs in the California and Delaware derivative  actions  entered into an  agreement to settle
those lawsuits. Under the terms of the settlement, HP agreed to continue certain corporate governance
changes until December 31, 2012 and to pay the plaintiffs’ attorneys’ fees. The California court granted
final approval to the settlement on March  11, 2008 and subsequently granted plaintiffs’ counsel’s  fee
application and dismissed the action. On June 12, 2008,  the Delaware  court granted  final approval  to
the settlement and the plaintiffs’ application  for attorneys’ fees  and  also  dismissed  the action. Because
neither the dismissal of the California nor the Delaware derivative action was thereafter  appealed, both
cases are now concluded.

151

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 18:  Litigation and Contingencies (Continued)

Environmental

HP is subject to various federal, state, local  and foreign  laws and regulations concerning

environmental protection, including laws  addressing  the discharge of pollutants into the air and water,
the management and disposal of hazardous substances and wastes, the  cleanup  of contaminated sites,
the content of its products and the recycling,  treatment and disposal  of its  products including batteries.
In particular, HP faces increasing complexity  in its product design and procurement operations as  it
adjusts to new and future requirements relating  to  the chemical and materials composition of its
products, their safe use, the energy consumption associated with those  products  and product take-back
legislation. HP could incur substantial costs, its products  could be restricted from  entering certain
jurisdictions, and it could face other sanctions, if it were to violate or become liable under
environmental laws or if its products become non-compliant with environmental laws. HP’s potential
exposure includes fines and civil or criminal  sanctions,  third-party property damage or personal injury
claims and clean up costs. The amount  and  timing  of costs  under environmental  laws  are difficult to
predict.

HP is party to, or  otherwise involved in, proceedings  brought by  U.S.  or  state environmental

agencies under the Comprehensive Environmental Response,  Compensation  and Liability Act
(‘‘CERCLA’’), known as ‘‘Superfund,’’ or state laws similar  to  CERCLA. HP  is also  conducting
environmental investigations or remediations at several current or former operating  sites pursuant to
administrative orders or consent agreements with  state environmental  agencies.

HP is also subject to legislation in an increasing number  of  jurisdictions that  makes  producers of

electrical goods, including computers and  printers,  financially responsible  for specified collection,
recycling, treatment and disposal of past  and future  covered  products (sometimes referred to as
‘‘product take-back legislation’’). For example, the  European Union  (‘‘EU’’) adopted the Waste
Electrical and Electronic Equipment Directive  in January 2003. That directive makes producers of
electrical goods, including computers and  printers,  financially responsible  for specified collection,
recycling, treatment and disposal of past  and future  covered  products. The EU  member states  were
obliged to make producers participating in the market financially  responsible  for implementing these
responsibilities.

Note 19:  Segment Information

Description of Segments

HP is a  leading global provider of products, technologies, software, solutions and services to
individual consumers, small and medium sized businesses (‘‘SMBs’’), and  large enterprises including
customers in the government, health  and education  sectors.  HP’s  offerings  span  personal  computing
and  other access devices; imaging and printing-related products and services; enterprise information
technology (‘‘IT’’)  infrastructure, including enterprise storage and server  technology and  networking
products; software that optimizes business technology investments;  financial  services including  leasing;
and  multi-vendor customer services, including technology support and  maintenance,  consulting  and
integration, information technology and  business process outsourcing  services and  application  services.

HP and its operations are organized into seven business segments for financial reporting purposes:

Services, ESS, HP Software, PSG, IPG,  HP Financial Services (‘‘HPFS’’), and  Corporate  Investments.
HP’s organizational structure is based on a number of factors that  management uses  to  evaluate, view

152

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 19:  Segment Information (Continued)

and  run its business operations, which include, but are not  limited  to,  customer base, homogeneity  of
products and technology. The business segments disclosed in  the accompanying  Consolidated  Financial
Statements are based on this organizational structure and information reviewed  by  HP’s  management
to evaluate the business segment results. Services, ESS  and HP Software  are  reported collectively as  a
broader HP Enterprise Business. In order to provide  a supplementary view  of HP’s business,
aggregated financial data for the HP Enterprise Business  is presented herein.

HP has reclassified segment operating  results for fiscal 2008  and fiscal  2007 to conform to certain

fiscal 2009 organizational realignments.  None of  the changes impacts HP’s previously reported
consolidated net revenue, earnings from operations,  net earnings  or  net earnings per share. Future
changes to this organizational structure may  result  in changes to the  business  segments disclosed.  A
description of the types of products and services provided by  each  business  segment follows.

HP Enterprise Business.

Each of the business segments within the HP  Enterprise  Business is described in detail  below.

(cid:129) Services, formerly HP Services, was renamed  after the  reorganization of the business units

subsequent to the acquisition of EDS in August 2008. Services provides consulting, outsourcing
and  technology services across infrastructure,  applications and business process domains. Services
is divided into four main business units: infrastructure technology  outsourcing, applications
services, business process outsourcing and technology services. Infrastructure technology
outsourcing delivers comprehensive services that encompass  the data center and the workplace
(desktop); network and communications; and security, compliance and business  continuity.  HP
also offers a set of managed services, providing a cross-section of its broader infrastructure
services for smaller discrete engagements. Applications services help clients  revitalize and
manage their applications assets through  flexible, project-based,  consulting services  and
longer-term outsourcing contracts. These full lifecycle services  encompass application
development, testing, modernization,  system integration, maintenance and management. Business
process outsourcing solutions include a broad array of enterprise shared  services, customer
relationship management services, financial  process management services and administrative
services. Technology services include consulting and support services, such  as mission critical
services, converged infrastructure services, networking  services, data  center transformation
services and infrastructure services, as well as warranty  support across HP’s product lines.

(cid:129) Enterprise Storage and Servers provides storage  and server products. The various server offerings

range  from entry-level servers to high-end  scalable servers, including Superdome  servers.
Industry standard servers include primarily entry-level and mid-range ProLiant servers, which  run
primarily Windows(cid:4)(1), Linux and Novell operating systems and leverage Intel Corporation
(‘‘Intel’’) and Advanced Micro Devices (‘‘AMD’’) processors. The  business  spans  a range of
product  lines, including pedestal-tower servers, density-optimized rack servers and HP’s
BladeSystem family of server blades. Business critical systems include Itanium(cid:4)(2)-based Integrity
servers running on HP-UX, Windows(cid:4), Linux, OpenVMS  and  NonStop  operating systems,
including the high-end Superdome servers and  fault-tolerant Integrity  NonStop servers. Business
critical systems also include the Reduced Instruction  Set Computing (‘‘RISC’’)-based servers
with the HP 9000 line running on the HP-UX operating  system, HP  AlphaServers running on
both Tru64 UNIX(cid:4)(3) and OpenVMS, and MIPs-based NonStop servers.  HP’s StorageWorks

153

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 19:  Segment Information (Continued)

offerings include entry-level, mid-range and  high-end arrays, storage area networks (‘‘SANs’’),
network attached storage (‘‘NAS’’), storage  management  software, and virtualization
technologies, as well as tape drives, tape libraries  and optical  archival  storage.

(cid:129) HP Software provides enterprise IT management  software solutions, including professional
services and support, that allow customers to manage  and automate  their IT  infrastructure,
operations, applications, IT services and business processes  under  the HP Business Technology
Optimization (‘‘BTO’’) brand. The portfolio of BTO  solutions  also  includes tools to automate
data center operations and IT processes.  These solutions are reported as  BTO Software.  HP
Software also provides a comprehensive suite of solutions  that enables communication  service
providers to deploy revenue generating  infrastructure and applications, customer  intelligence and
billing systems, and operational support systems. In  addition, for media companies and
distributors, HP Software provides solutions that  address  content management and  streamlining
of digital media workflows. HP Software further provides information management and  business
intelligence solutions, which include enterprise data  warehousing, business continuity, data
availability, records management, compliance and e-discovery products and services that enable
our customers to extract more value  from  their  structured and  unstructured data and
information. These solutions are reported  as Other Software.

HP’s other business segments are described below.

(cid:129) Personal  Systems Group provides commercial PCs, consumer PCs, workstations, handheld
computing devices, calculators and other related accessories, software  and services  for the
commercial and consumer markets. Commercial PCs are optimized for commercial uses,
including enterprise and SMB customers, and for  connectivity and manageability in networked
environments. Commercial PCs include  the HP Compaq business desktops and notebooks, HP
EliteBook Tablet Pcs, the HP EliteBook  and  ProBook lines of professional notebooks, as  well as
the HP Mini-Note PC, HP Blade PCs, Retail  POS systems, and  HP Thin Clients.  Consumer PCs
are targeted at the home user and include the HP Pavilion and Compaq Presario  series of multi
media consumer desktops and notebooks, as  well as the HP Pavilion Elite desktops, HP Envy
Premium notebooks, Touchsmart PCs, HP  and  Compaq Mini notebooks,  Voodoo  Gaming PCs
and  the Media Smart Home Server. HP’s  Z  series desktop workstations  and HP  Elitebook
Mobile Workstations provide advanced graphics,  computing, and large modeling capabilities,
certified with applications in a wide range of industries and running both Windows(cid:4) and Linux
operating systems. PSG provides a series of HP  iPAQ Pocket  PC handheld computing devices
that run on Windows(cid:4) Mobile software. These products range  from basic PDAs to advanced
devices with voice and data capability.

(cid:129) Imaging and Printing Group provides  consumer and commercial  printer hardware, printing

supplies, printing media and scanning devices. IPG  is also  focused  on  imaging solutions in  the
commercial markets, from managed print services solutions  to  addressing new growth
opportunities in commercial printing  and  capturing high-value pages in  areas such  as industrial
applications, outdoor signage, and the graphic arts business. Inkjet and Web  Solutions delivers

(1) Windows(cid:4) is a registered trademark of Microsoft  Corporation.
Itanium(cid:4) is a registered trademark of Intel Corporation.
(2)
(3) UNIX(cid:4) is a registered trademark of The Open Group.

154

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 19:  Segment Information (Continued)

HP’s consumer and SMB inkjet solutions  (hardware, ink, media) and develops HP’s retail  and
web businesses. It includes single function and all-in-one inkjet printers targeted toward
consumers and SMBs as well as retail publishing solutions, Snapfish, and  Logoworks. LaserJet
and  Enterprise Solutions delivers products and services  to the enterprise segment. It includes
LaserJet printers and supplies, multi-function printers,  scanners, enterprise software  solutions
such  as Exstream Software and Web  Jetadmin,  managed print services products and solutions,
and  Halo telepresence. Graphics solutions include large format  printing (Designjet, Scitex,
ColorSpan and NUR), large format supplies, WebPress supplies, Indigo  printing, specialty
printing systems, inkjet high-speed production solutions and light production solutions. Printer
supplies include LaserJet toner and inkjet printer  cartridges and other printing-related media.

(cid:129) HP Financial Services supports and enhances HP’s global product and services  solutions,

providing a broad range of value-added  financial life-cycle management services. HPFS enables
HP’s worldwide customers to acquire  complete IT solutions,  including hardware, software  and
services. HPFS offers leasing, financing, utility programs, and asset recovery services, as  well as
financial asset management services, for large global and enterprise customers. HPFS also
provides an array of specialized financial services to SMBs  and educational and governmental
entities. HPFS offers innovative, customized  and flexible  alternatives  to  balance unique customer
cash flow, technology obsolescence and capacity needs.

(cid:129) Corporate Investments includes HP Labs and  certain business incubation projects. Revenue in this
segment is attributable to the sale of certain  network infrastructure products, including Ethernet
switch products that enhance computing and enterprise solutions sold under  the brand
‘‘ProCurve Networking.’’

Segment Data

HP derives the results of the business segments directly from its internal management reporting
system. The accounting policies HP uses to derive  business segment  results are  substantially  the same
as those the consolidated company uses. Management measures the performance of each business
segment based on several metrics, including  earnings from operations. Management uses these  results,
in part, to evaluate the performance of, and to assign resources to, each of the  business  segments. HP
does not allocate to its business segments  certain operating expenses,  which it manages separately at
the corporate level. These unallocated costs include primarily amortization  of  purchased intangible
assets, stock-based compensation expense related to HP-granted employee stock options, PRUs and the
employee stock purchase plan, certain acquisition-related charges and  charges for  purchased IPR&D, as
well as certain corporate governance costs.

HP does not allocate to its business segments restructuring charges and any associated  adjustments

related to restructuring actions.

155

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 19:  Segment Information (Continued)

Selected operating results information for each  business segment was as  follows for  the following

fiscal years ended October 31:

Total Net Revenue
2008(2)

2009

2007(2)

Earnings (Loss) from
Operations
2008(2)

2009

2007(2)

In millions

Services(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,693 $ 20,977 $ 15,329 $ 5,044 $ 2,518 $ 1,782
2,148
Enterprise Storage and Servers . . . . . . . . . . . .
248
HP Software . . . . . . . . . . . . . . . . . . . . . . . . . .

19,400
4,220

18,639
3,628

15,359
3,572

1,518
684

2,577
499

HP Enterprise Business . . . . . . . . . . . . . . . . . .

53,624

44,597

37,596

7,246

Personal Systems Group . . . . . . . . . . . . . . . . .
Imaging and Printing Group . . . . . . . . . . . . . .
HP Financial Services . . . . . . . . . . . . . . . . . . .
Corporate Investments . . . . . . . . . . . . . . . . . .

35,305
24,011
2,673
768

42,295
29,614
2,698
965

36,409
28,609
2,336
762

1,661
4,310
206
(56)

5,594

2,375
4,559
192
49

4,178

1,939
4,293
155
(57)

Segment total . . . . . . . . . . . . . . . . . . . . . . . . . $116,381 $120,169 $105,712 $13,367 $12,769 $10,508

(1)

Includes  the results of EDS, which was acquired  on August 26, 2008, from the date  of acquisition.

(2) Certain fiscal 2009 organizational reclassifications have  been reflected retroactively to provide

improved visibility and comparability. In  fiscal  2008 and 2007, the reclassifications resulted in the
transfer of revenue and operating profit among the  Services, HP Software and  Imaging and
Printing Group financial reporting segments.  In addition,  certain previously allocated costs  were
reclassified to unallocated costs related  to  stock-based compensation  expense. There was no impact
on the previously reported financial results  for the Enterprise Storage and Servers, Personal
Systems Group, HP Financial Services  and Corporate Investments  segments.

156

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 19:  Segment Information (Continued)

The reconciliation of segment operating results information  to  HP consolidated totals was as

follows for the following fiscal years ended October 31:

2009

2008

2007

In millions

Net revenue:
Segment total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Elimination of intersegment net revenue  and other . . . . . . . . . . . . . .

$116,381
(1,829)

$120,169
(1,805)

$105,712
(1,426)

Total HP consolidated net revenue . . . . . . . . . . . . . . . . . . . . . . . . . .

$114,552

$118,364

$104,286

Earnings before taxes:
Total segment earnings from operations . . . . . . . . . . . . . . . . . . . . . .
Corporate and unallocated costs and  eliminations . . . . . . . . . . . . . . .
Unallocated costs related to certain stock-based compensation

expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of purchased intangible assets . . . . . . . . . . . . . . . . . . .
In-process research and development charges . . . . . . . . . . . . . . . . . .
Acquisition-related charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension curtailments and settlements, net . . . . . . . . . . . . . . . . . . . . .
Interest and other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 13,367
(219)

$ 12,769
(461)

$ 10,508
(439)

(552)
(1,571)
(7)
(242)
(640)
—
(721)

(512)
(967)
(45)
(41)
(270)
—
—

(507)
(783)
(190)
—
(387)
517
458

Total HP consolidated earnings before  taxes . . . . . . . . . . . . . . . . . . .

$

9,415

$ 10,473

$

9,177

HP allocates its assets to its business segments based on the primary segments  benefiting from the

assets. Corporate and unallocated assets are composed primarily of cash and cash  equivalents. As
described above, fiscal 2009 segment  asset information is stated based  on  the fiscal 2009 organizational
structure. Total assets by segment as well  as for  HP Enterprise  Business and the reconciliation of
segment assets to HP consolidated total assets were as  follows at October 31:

2009

2008

2007

Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Enterprise Storage and Servers . . . . . . . . . . . . . . . .
HP Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 43,555
11,662
8,936

In millions
$ 42,507
11,644
8,919

$17,232
13,518
8,366

HP Enterprise Business . . . . . . . . . . . . . . . . . . . .

$ 64,153

$ 63,070

$39,116

Personal Systems Group . . . . . . . . . . . . . . . . . . . . .
Imaging and Printing Group . . . . . . . . . . . . . . . . . .
HP Financial Services . . . . . . . . . . . . . . . . . . . . . . .
Corporate Investments . . . . . . . . . . . . . . . . . . . . . .
Corporate and unallocated assets . . . . . . . . . . . . . .

14,825
11,698
10,806
460
12,857

16,436
14,156
9,174
365
10,130

14,153
14,573
9,001
297
11,559

Total HP consolidated assets . . . . . . . . . . . . . . . . . .

$114,799

$113,331

$88,699

157

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 19:  Segment Information (Continued)

Major Customers

No single customer represented 10% or  more of HP’s total net revenue  in any  fiscal year

presented.

Geographic Information

Net revenue, classified by the major geographic areas in  which HP operates, was  as follows for  the

following fiscal years ended October  31:

Net revenue:
U.S.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 41,314
73,238

$ 36,932
81,432

$ 34,814
69,472

Total HP consolidated net revenue . . . . . . . . . . . .

$114,552

$118,364

$104,286

2009

2008

2007

In millions

Net revenue by geographic area is based upon the sales location  that predominately represents the
customer location. Other than the United  States,  no single country represented more  than 10%  of  HP’s
total consolidated net revenue in any period presented.  HP reports revenue net of sales taxes,  use taxes
and value-added taxes directly imposed  by governmental authorities on HP’s revenue producing
transactions with its customers.

At October 31, 2009 and 2008, Belgium and the United  States had  10%  or more of  HP’s  total
consolidated net assets. At October 31,  2007, no  single country  other than  the United States  had 10%
or more of HP’s total consolidated net  assets.

No single country other than the United States had more than 10%  of  HP’s  total consolidated net
property, plant and equipment in any  period  presented. HP’s long-lived assets other than  goodwill  and
purchased intangible assets, are composed principally of net property, plant and equipment.

Net property, plant and equipment, classified by major geographic  areas in which HP operates, was

as follows for the following fiscal years ended  October 31:

Net property, plant and equipment:
U.S.
Non-U.S.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 6,316
4,946

$ 6,223
4,615

$4,321
3,477

Total HP consolidated net property, plant and  equipment . . . . . . . . . . . . .

$11,262

$10,838

$7,798

2009

2008

2007

In millions

158

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 19:  Segment Information (Continued)

Net revenue by segment and business unit

The following table provides net revenue by segment and business unit  for the  following  fiscal

years ended October 31:

Net revenue:

2009

2008(2)
In millions

2007(2)

Infrastructure technology outsourcing . . . . . . . . . . . . . . . . . . . .
Technology services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Application services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business process outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 15,751
9,789
6,032
2,941
180

$

Services(1)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

34,693

Industry standard servers . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business critical systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9,296
3,473
2,590

Enterprise Storage and Servers . . . . . . . . . . . . . . . . . . . . . . . . . . .

15,359

Business technology optimization . . . . . . . . . . . . . . . . . . . . . . . .
Other software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

HP Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

HP Enterprise Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Notebooks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Desktops . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Workstations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Handhelds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Personal Systems Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial hardware . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer hardware . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Imaging and Printing Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

HP Financial Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate Investments

2,385
1,187

3,572

53,624

20,210
12,864
1,261
172
798

35,305

16,532
4,778
2,701

24,011

2,673
768

7,488
10,297
2,411
723
58

20,977

11,657
4,205
3,538

19,400

2,792
1,428

4,220

44,597

22,657
16,643
1,885
360
750

42,295

18,472
7,422
3,720

29,614

2,698
965

$

4,671
9,441
1,102
115
—

15,329

11,380
3,706
3,553

18,639

2,276
1,352

3,628

37,596

17,650
15,889
1,721
531
618

36,409

17,018
7,371
4,220

28,609

2,336
762

Total segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

116,381

120,169

105,712

Eliminations of inter-segment net revenue and  other . . . . . . . . . . . . .

(1,829)

(1,805)

(1,426)

Total HP consolidated net revenue . . . . . . . . . . . . . . . . . . . . . .

$114,552

$118,364

$104,286

(1)

Includes  the results of EDS, which was acquired  on August 26, 2008, from the date  of acquisition.
The businesses included in the former HP consulting and integration business unit were divided
among the application services and technology services  business units and the HP Software

159

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (Continued)

Note 19:  Segment Information (Continued)

segment. The businesses included in the former outsourcing services business unit  were divided
among the infrastructure technology outsourcing and business  process outsourcing business units.
The infrastructure technology outsourcing, application services and business  process  outsourcing
business units were added with the technology services business unit,  and these four  business  units
now comprise the  Services segment.

(2) Certain fiscal 2009 organizational reclassifications have  been reflected retroactively to provide

improved visibility and comparability. In  fiscal  2008 and 2007, the reclassifications resulted in the
transfer of revenue among the Services,  HP Software and Imaging and Printing Group financial
reporting segments. In addition, revenue was transferred among the business units within the
Services, HP Software, Imaging and Printing Group, and Personal Systems Group segments. There
was no impact on the previously reported  financial results for the Enterprise Storage and Servers,
HP Financial Services and Corporate  Investments segments.

160

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Quarterly Summary
(Unaudited)
(In millions, except per share amounts)

2009
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . .
Amortization of purchased intangible assets . . . . . . . . . .
In-process research and development charges . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition-related charges . . . . . . . . . . . . . . . . . . . . . .
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from operations . . . . . . . . . . . . . . . . . . . . . . .
Interest and other, net . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings before taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings per share:(2)

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid per share . . . . . . . . . . . . . . . . . . . .
Range of per share stock prices on the  New  York Stock

Exchange
Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Three-month periods ended

January 31

April 30

July 31

October 31(3)

(Restated)

(Restated)

(Restated)

$28,807
22,073
732
2,893
412
6
146
48
26,310
2,497
(232)
2,265
409
$ 1,856

$27,383
20,945
716
2,880
380
—
94
75
25,090
2,293
(180)
2,113
392
$ 1,721

$27,585
21,031
667
2,874
379
—
362
59
25,372
2,213
(177)
2,036
365
$ 1,671

$
$
$

0.77
0.75
0.08

$
$
$

0.72
0.71
0.08

$
$
$

0.70
0.69
0.08

$30,777
23,475
704
2,966
400
1
38
60
27,644
3,133
(132)
3,001
589
$ 2,412

$
$
$

1.02
0.99
0.08

$ 28.23
$ 39.53

$ 25.39
$ 37.40

$ 33.40
$ 43.55

$ 42.14
$ 49.20

The amounts previously reported in HP’s Quarterly  Reports on Form 10-Q for  fiscal  2009 have
been restated for the adoption of ASU  2009-13 and ASU  2009-14, which  are discussed more  fully in
Note 1. The impact from the adoption  was as follows:

Three-month periods ended

January 31

April 30

July 31

Net Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings before taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings per share—Diluted . . . . . . . . . . . . . . . . .

$ 7
4
3
2
$—

$ 32
26
6
5
$0.01

$ 134
95
39
29
$0.02

161

2008
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development
. . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . .
Amortization of purchased intangible assets . . . . . . . . . . . .
In-process research and development charges . . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition-related charges . . . . . . . . . . . . . . . . . . . . . . . .
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from operations
Interest and other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings per share:(2)

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid per share . . . . . . . . . . . . . . . . . . . . . .
Range of per share stock prices on the  New  York Stock

Exchange
Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1) Cost of products, cost of services and  financing  interest.

Three-month periods ended

January 31

April 30

July 31

October 31

$28,467
21,444(4)
898
3,296(4)
206
—
10
—
25,854
2,613
72
2,685
552
$ 2,133

$28,262
21,205(4) 21,197(4)

$28,032

908
3,331(4)
211
13
4
—
25,672
2,590
3
2,593
536
$ 2,057

895
3,193(4)
213
—
5
—
25,503
2,529
23
2,552
525
$ 2,027

$33,603
25,853(4)
842
3,506(4)
337
32
251
41
30,862
2,741
(98)
2,643
531
$ 2,112

$
$
$

0.83
0.80
0.08

$
$
$

0.83
0.80
0.08

$
$
$

0.82
0.80
0.08

$
$
$

0.87
0.84
0.08

$ 39.99
$ 53.48

$ 40.16
$ 49.69

$ 40.83
$ 49.97

$ 30.03
$ 49.20

(2) EPS for each quarter is computed using the  weighted-average number of shares  outstanding during
that quarter, while EPS for the fiscal year  is  computed  using the weighted-average number of
shares outstanding during the year. Thus,  the sum of  the EPS for each of  the four quarters may
not equal the EPS for the fiscal year.

(3) As a  result of the adoption of ASU 2009-13  and ASU 2009-14, fourth quarter net revenue and  net

earnings were higher by $82 million and $19 million, respectively.

(4) Certain pursuit-related costs previously reported  as Cost of  sales  have been  realigned retroactively

to Selling, general and administrative expenses due  to  organizational  realignments.

162

ITEM 9. Changes in and Disagreements  with Accountants on Accounting and  Financial Disclosure.

None.

ITEM 9A. Controls and Procedures.

Controls and Procedures

Under the supervision and with the participation of  our management, including  our  principal
executive officer and principal financial officer, we conducted  an evaluation of  the effectiveness  of the
design and operation of our disclosure  controls  and procedures, as  defined  in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange  Act  of 1934, as  amended, as  of  the end  of  the period  covered
by this report (the ‘‘Evaluation Date’’). Based on  this  evaluation, our  principal executive officer and
principal financial officer concluded as  of the Evaluation Date  that our  disclosure controls and
procedures were effective such that the  information relating to HP,  including our consolidated
subsidiaries, required to be disclosed  in  our Securities and  Exchange Commission (‘‘SEC’’) reports (i) is
recorded, processed, summarized and  reported  within the  time periods specified in  SEC rules and
forms, and (ii) is accumulated and communicated to HP’s management,  including our principal
executive officer and principal financial officer, as  appropriate  to  allow  timely decisions regarding
required disclosure.

Under the supervision and with the participation of  our management, including  our  principal
executive officer and principal financial officer, we conducted  an evaluation of  any changes  in our
internal control over financial reporting (as such term is defined in Rules 13a-15(f) and  15d-15(f) under
the Exchange Act) that occurred during our most recently completed fiscal quarter. Based on that
evaluation, our principal executive officer and principal financial officer concluded that there  has not
been any change in our internal control  over financial reporting during that quarter that has materially
affected, or is reasonably likely to materially affect, our internal  control over financial reporting.

See Management’s Report on Internal Control over  Financial  Reporting in Item 8, which is

incorporated herein by reference.

ITEM 9B. Other Information.

Not applicable.

163

ITEM 10. Directors, Executive Officers and Corporate Governance.

PART III

The names of the  executive officers of HP  and  their  ages,  titles and biographies as  of  the date

hereof are incorporated by reference from Part I, Item 1, above.

The following information is included in HP’s  Proxy Statement related to  its 2010 Annual  Meeting

of Stockholders to be filed within 120  days after  HP’s fiscal year end  of  October 31,  2009 (the ‘‘Proxy
Statement’’) and is incorporated herein by reference:

(cid:129) Information regarding directors of  HP who are standing for reelection  and any persons

nominated to become directors of HP is  set forth under ‘‘Election  of  Directors.’’

(cid:129) Information regarding HP’s Audit Committee and designated  ‘‘audit committee financial
experts’’ is set forth under ‘‘Corporate Governance Principles and Board  Matters—Board
Structure and Committee Composition—Audit Committee.’’

(cid:129) Information on HP’s code of business conduct and ethics  for directors, officers and employees,

also known as the ‘‘Standards of Business Conduct,’’ and on HP’s Corporate Governance
Guidelines is set forth under ‘‘Corporate  Governance Principles and Board Matters.’’

(cid:129) Information regarding Section 16(a) beneficial ownership reporting compliance is  set forth under

‘‘Section 16(a) Beneficial Ownership  Reporting Compliance.’’

ITEM 11. Executive Compensation.

The following information is included in the  Proxy  Statement and is incorporated herein by

reference:

(cid:129) Information regarding HP’s compensation of its named  executive officers is set  forth under

‘‘Executive Compensation.’’

(cid:129) Information regarding HP’s compensation of its directors  is set forth  under ‘‘Director

Compensation and Stock Ownership Guidelines.’’

(cid:129) The report of HP’s HR and Compensation Committee is  set  forth under  ‘‘HR and

Compensation Committee Report on  Executive Compensation.’’

ITEM 12. Security Ownership of Certain  Beneficial Owners  and  Management  and Related  Stockholder

Matters.

The following information is included in the  Proxy  Statement and is incorporated herein by

reference:

(cid:129) Information regarding security ownership of certain  beneficial owners,  directors and executive

officers is set forth under ‘‘Common Stock  Ownership of Certain Beneficial Owners  and
Management.’’

(cid:129) Information regarding HP’s equity  compensation plans,  including  both  stockholder  approved

plans and non-stockholder approved plans, is set forth in the section entitled  ‘‘Equity
Compensation Plan Information.’’

164

ITEM 13. Certain Relationships and  Related Transactions, and Director Independence.

The following information is included in the  Proxy  Statement and is incorporated herein by

reference:

(cid:129) Information regarding transactions  with  related persons  is set forth under ‘‘Related Person

Transaction Policies and Procedures.’’

(cid:129) Information regarding director independence  is set forth  under ‘‘Corporate Governance

Principles and Board Matters—Director  Independence.’’

ITEM 14. Principal Accountant Fees  and  Services.

Information regarding principal auditor fees and services is set forth under ‘‘Principal  Accountant

Fees and Services’’ in the Proxy Statement, which  information  is incorporated herein by reference.

165

PART IV

ITEM 15. Exhibits and Financial Statement Schedules.

(a) The following documents are filed as part of this report:

1. All Financial Statements:

The following financial statements are filed as  part of  this  report  under Item  8—‘‘Financial

Statements and Supplementary Data.’’

Reports of Independent Registered Public  Accounting  Firm . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Report on Internal Control  Over  Financial  Reporting . . . . . . . . . . . . . . . . . .
Consolidated Statements of Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’  Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quarterly Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

77
79
80
81
82
83
84
161

2.

Financial Statement Schedules:

Schedule II—Valuation and Qualifying Accounts for the three fiscal years ended October 31, 2009.

All other schedules are omitted as the required  information is  inapplicable or the information is
presented in the Consolidated Financial Statements and notes thereto  in Item  8 above.

3. Exhibits:

A list of exhibits filed or furnished with  this report  on Form 10-K (or incorporated by reference to
exhibits previously  filed or furnished by HP)  is provided in the accompanying Exhibit Index. HP
will furnish copies of exhibits for a reasonable fee (covering  the expense of  furnishing copies)  upon
request. Stockholders may request exhibits copies by contacting:

Hewlett-Packard Company
Attn: Investor Relations
3000 Hanover Street
Palo Alto, CA 94304
(866) GET-HPQ1 or (866) 438-4771

166

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Valuation and Qualifying Accounts

Schedule II

For the fiscal years ended
October 31

2009

2008

2007

In millions

Allowance for doubtful accounts — accounts receivable:

Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount acquired through acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Addition of bad debt provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deductions, net of recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 553
—
282
(206)

$ 226
245
226
(144)

$ 220
3
32
(29)

Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 629

$ 553

$ 226

Allowance for doubtful accounts — financing receivables:

Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions to allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deductions, net of recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 90
63
(45)

$ 84
49
(43)

$ 80
15
(11)

Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 108

$ 90

$ 84

167

SIGNATURES

Pursuant to the requirements of Section  13  or 15(d) of the Securities Exchange Act of 1934, the

registrant has duly caused this report to be signed on its  behalf  by the undersigned,  thereunto duly
authorized.

Date: December 17, 2009

HEWLETT-PACKARD COMPANY

By:

/s/ CATHERINE A. LESJAK

Catherine A. Lesjak
Executive Vice President and
Chief Financial Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE  PRESENTS, that each person whose  signature appears
below constitutes and appoints Catherine  A.  Lesjak, Michael J. Holston  and Paul T. Porrini, or any of
them, his or her attorneys-in-fact, for such person in any and all capacities, to sign any amendments to
this  report and to file the same, with  exhibits thereto, and other  documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all that either of said
attorneys-in-fact, or substitute or substitutes, may do or  cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange  Act of 1934, this report has  been signed

below by the following persons on behalf of  the registrant and in the capacities  and on the dates
indicated.

Signature

Title(s)

Date

/s/ MARK V. HURD

Mark V. Hurd

/s/ CATHERINE A. LESJAK

Catherine A. Lesjak

/s/ JAMES T. MURRIN

James T. Murrin

/s/ MARC L.  ANDREESSEN

Marc L. Andreessen

/s/ LAWRENCE T. BABBIO, JR.

Lawrence T. Babbio, Jr.

/s/ SARI M. BALDAUF

Sari M. Baldauf

/s/ RAJIV L.  GUPTA

Rajiv L. Gupta

Chairman, Chief Executive Officer

and President
(Principal Executive Officer)

Executive Vice President and Chief

Financial Officer
(Principal Financial Officer)

December 17, 2009

December 17, 2009

Senior Vice President and Controller
(Principal Accounting Officer)

December 17, 2009

Director

Director

Director

Director

168

December 17, 2009

December 17, 2009

December 17, 2009

December 17, 2009

Signature

Title(s)

Date

/s/ JOHN H. HAMMERGREN

John H. Hammergren

/s/ JOEL Z. HYATT

Joel Z. Hyatt

/s/ JOHN R. JOYCE

John R. Joyce

/s/ ROBERT L. RYAN

Robert L. Ryan

/s/ LUCILLE S. SALHANY

Lucille S. Salhany

/s/ G. KENNEDY THOMPSON

G. Kennedy Thompson

Director

Director

Director

Director

Director

Director

December 17, 2009

December 17, 2009

December 17, 2009

December 17, 2009

December 17, 2009

December 17, 2009

169

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
EXHIBIT INDEX

Exhibit
Number

Exhibit Description

Form

File No.

Exhibit(s)

Filing Date

Incorporated by Reference

3(a) Registrant’s Certificate of

10-Q 001-04423

3(a)

June 12,  1998

Incorporation.

3(b) Registrant’s Amendment to the
Certificate of Incorporation.

10-Q 001-04423

3(b)

March 16, 2001

3(c) Registrant’s Amended and Restated

8-K 001-04423

By-Laws effective  March 18, 2009.

4(a) Form of Senior Indenture.

S-3

333-30786

4(b) Form of Registrant’s Fixed Rate

8-K 001-04423

3.1

4.1

September 17, 2009

March 17, 2000

4.1, 4.2 May 24, 2001
and 4.4

8-K 001-04423 4.2 and 4.3 June 27, 2002

8-K 001-04423 4.1 and 4.2 December  11, 2002

S-3 333-134327

4.9

June  7, 2006

Note and Floating Rate Note  and
related Officers’ Certificate.

4(c) Form of Registrant’s 6.50% Global
Note due July 1, 2012, and form of
related Officers’ Certificate.

4(d) Form of Registrant’s Fixed Rate
Note and form of Floating Rate
Note.

4(e) Indenture, dated as of June 1, 2000,
between the Registrant and J.P.
Morgan Trust Company, National
Association (formerly Chase
Manhattan Bank), as Trustee.

Global  Note due March 1, 2012,
form of 5.25% Global Note due
March 1, 2012 and form of 5.40%
Global  Note due March 1, 2017.

4(g) Form of Registrant’s Floating  Rate
Global  Note due June 15, 2009 and
Floating Rate Global Note due
June 15, 2010.

Global  Note due September 3, 2009,
4.50% Global Note due March 1,
2013 and 5.50% Global Note due
March 1, 2018.

4(i) Form of Registrant’s 6.125% Global
Note due March 1, 2014 and form of
related Officers’ Certificate.

170

4(f) Form of Registrant’s Floating Rate

8-K 001-04423

4.1, 4.2
and 4.3

February  28, 2007

10-Q 001-04423

4(l)

September 7, 2007

4(h) Form of Registrant’s Floating Rate

8-K 001-04423

4.1,  4.2
and 4.3

February 29,  2008

8-K 001-04423 4.1 and 4.2 December 8, 2008

Exhibit
Number

Exhibit Description

Form

File No.

Exhibit(s)

Filing Date

Incorporated by Reference

4(j) Form of Registrant’s Floating Rate
Global  Note due February 24, 2011,
4.250% Global Note due
February 24, 2012 and 4.750%
Global  Note due June 2, 2014 and
form of related Officers’ Certificate.

4(k) Form of Registrant’s Floating Rate
Global  Note due May 27, 2011,
2.25% Global Note due May 27,
2011 and 2.95% Global Note due
August  15, 2012 and form of related
Officers’ Certificate.

4(l) Speciman certificate for the
Registrant’s common stock.

9 None.

8-K 001-04423

4.1, 4.2,
4.3 and 4.4

February  27, 2009

8-K 001-04423

4.1, 4.2, May  28, 2009

4.3 and 4.4

8-A/A 001-04423

4.1

June 23, 2006

10(a) Registrant’s 2004 Stock Incentive

S-8 333-114253

4.1

April 7, 2004

Plan.*

10(b) Registrant’s 2000 Stock Plan,

10-K 001-04423

10(b)

December 18, 2008

amended and restated effective
September 17, 2008.*

10(c) Registrant’s 1997 Director Stock

8-K 001-04423

99.4

November 23, 2005

Plan, amended and restated effective
November 1, 2005.*

10(d) Registrant’s 1995 Incentive Stock

10-Q 001-04423

10(d)

June 8, 2007

Plan, amended and restated effective
May 1, 2007.*

10(e) Registrant’s 1990 Incentive Stock

10-Q 001-04423

10(e)

June  8, 2007

Plan, amended and restated effective
May 1, 2007.*

10(f) Compaq Computer Corporation

10-K 001-04423

10(f)

January 21, 2003

2001 Stock Option Plan, amended
and restated effective November 21,
2002.*

10(g) Compaq Computer Corporation

10-K 001-04423

10(g)

January 21,  2003

1998 Stock Option Plan, amended
and restated effective November 21,
2002.*

10(h) Compaq Computer Corporation

10-K 001-04423

10(h)

January 21, 2003

1995 Equity Incentive Plan, amended
and restated effective November 21,
2002.*

10(i) Compaq Computer Corporation

10-K 001-04423

10(i)

January 21, 2003

1989 Equity Incentive Plan, amended
and restated effective November 21,
2002.*

171

Exhibit
Number

Exhibit Description

Form

File No.

Exhibit(s)

Filing Date

Incorporated by Reference

10(j) Compaq Computer Corporation
1985 Nonqualified  Stock Option
Plan for Non-Employee Directors.*

S-3

333-86378

10.5

April 18, 2002

10(k) Amendment of Compaq Computer

S-3

333-86378

10.11

April 18, 2002

Corporation Non-Qualified Stock
Option Plan for Non-Employee
Directors, effective September 3,
2001.*

10(l) Compaq Computer Corporation
1998 Former Nonemployee
Replacement Option Plan.*

S-3

333-86378

10.9

April  18, 2002

10(m) Registrant’s Excess Benefit

8-K 001-04423

10.2

September 21, 2006

Retirement Plan, amended and
restated as of January 1, 2006.*

10(n) Hewlett-Packard Company Cash

8-K 001-04423

99.3

November  23, 2005

Account Restoration Plan, amended
and restated as of January 1, 2005.*

10(o) Registrant’s 2005 Pay-for-Results

8-K 001-04423

99.5

November 23, 2005

Plan.*

10(p) Registrant’s 2005 Executive Deferred
Compensation Plan, as amended and
restated effective October 1, 2006.*

8-K 001-04423

10.1

September  21, 2006

10(q) First Amendment to the Registrant’s

10-Q 001-04423

10(q)

June 8, 2007

2005 Executive Deferred
Compensation Plan, as amended and
restated effective October 1, 2006.*

10(r) Employment Agreement, dated

8-K 001-04423

99.1

March  30, 2005

March 29, 2005, between Registrant
and Mark V. Hurd.*

10(s) Employment Agreement, dated

10-Q 001-04423

10(x)

September 8, 2005

June 9, 2005, between Registrant
and R. Todd Bradley.*

10(t) Employment Agreement, dated

10-Q 001-04423

10(y)

September 8, 2005

July 11, 2005, between Registrant
and Randall D. Mott.*

10(u) Registrant’s Amended and Restated
Severance Plan for Executive
Officers.*

8-K 001-04423

99.1

July 27, 2005

10(v) Form letter to participants in the

10-Q 001-04423

10(w) March 10,  2006

Registrant’s Pay-for-Results Plan for
fiscal year 2006.*

10(w) Registrant’s Executive Severance

10-Q 001-04423

10(u)(u)

June 13, 2002

Agreement.*

172

Exhibit
Number

Exhibit Description

Form

File No.

Exhibit(s)

Filing Date

Incorporated by Reference

10(x) Registrant’s Executive Officers
Severance Agreement.*

10-Q 001-04423

10(v)(v)

June 13, 2002

10(y) Form letter regarding severance

8-K 001-04423

10.2

March 22, 2005

offset for restricted stock and
restricted units.*

10(z) Form of Indemnity Agreement

10-Q 001-04423

10(x)(x)

June  13, 2002

between Compaq Computer
Corporation and its executive
officers.*

10(a)(a) Form of Stock Option Agreement

10-Q 001-04423

10(a)(a)

June 8, 2007

for Registrant’s 2004 Stock Incentive
Plan, Registrant’s 2000 Stock Plan,
as amended, Registrant’s 1995
Incentive Stock Plan, as amended,
the Compaq Computer Corporation
2001 Stock Option Plan, as
amended, the Compaq Computer
Corporation 1998 Stock Option Plan,
as amended, the Compaq Computer
Corporation 1995 Equity Incentive
Plan, as amended  and the Compaq
Computer Corporation 1989 Equity
Incentive Plan, as amended.*

10(b)(b) Form of  Restricted Stock Agreement
for Registrant’s 2004 Stock Incentive
Plan, Registrant’s 2000 Stock Plan,
as amended, and Registrant’s 1995
Incentive Stock Plan, as amended.*

10-Q 001-04423

10(b)(b)

June  8, 2007

10(c)(c) Form of Restricted Stock Unit

10-Q 001-04423

10(c)(c)

June 8, 2007

Agreement for Registrant’s 2004
Stock Incentive Plan.*

10(d)(d) Form of Stock Option Agreement

10-K 001-04423

10(e)

January  27, 2000

for Registrant’s 1990 Incentive Stock
Plan, as amended.*

10(e)(e) Form of Common Stock Payment

10-Q 001-04423

10(j)(j) March 11, 2005

Agreement and Option Agreement
for Registrant’s 1997 Director Stock
Plan, as amended.*

10(f)(f) Form of Restricted Stock Grant

10-Q 001-04423

10(w)(w)

June 13,  2002

Notice for the Compaq Computer
Corporation 1989 Equity Incentive
Plan.*

173

Exhibit
Number

Exhibit Description

Form

File No.

Exhibit(s)

Filing Date

Incorporated by Reference

10(g)(g) Forms of Stock Option Notice  for

10-K 001-04423

10(r)(r)

January 14, 2005

the Compaq Computer Corporation
Non-Qualified Stock Option Plan for
Non-Employee Directors, as
amended.*

10(h)(h) Form of Long-Term Performance

10-K 001-04423

10(t)(t)

January  14, 2005

Cash Award Agreement for
Registrant’s 2004 Stock Incentive
Plan and Registrant’s 2000 Stock
Plan, as amended.*

10(i)(i) Amendment One to the Long-Term

10-Q 001-04423

10(q)(q)

September 8, 2005

Performance Cash Award Agreement
for the 2004 Program.*

10(j)(j) Form of Long-Term Performance

10-Q 001-04423

10(r)(r)

September 8, 2005

Cash Award Agreement for the 2005
Program.*

10(k)(k) Form of Long-Term Performance

10-Q 001-04423

10(o)(o) March 10, 2006

Cash Award Agreement.*

10(l)(l) Second Amendment to the

10-K 001-04423

10(l)(l) December 18, 2007

Registrant’s 2005 Executive Deferred
Compensation Plan, as amended and
restated effective October 1, 2006.*

10(m)(m) Form of Stock Notification  and
Award Agreement for awards of
performance-based restricted units.*

8-K 001-04423

10.1

January  24, 2008

10(n)(n) Form of Agreement Regarding

8-K 001-04423

10.2

January 24, 2008

Confidential Information and
Proprietary Developments
(California).*

10(o)(o) Form of Agreement Regarding

10-Q 001-04423

10(o)(o) March 10,  2008

Confidential Information and
Proprietary Developments (Texas).*

10(p)(p) Form of Restricted Stock Agreement
for Registrant’s 2004 Stock Incentive
Plan.*

10-Q 001-04423

10(p)(p) March  10, 2008

10(q)(q) Form of Restricted Stock Unit

10-Q 001-04423

10(q)(q) March  10, 2008

Agreement for Registrant’s 2004
Stock Incentive Plan.*

10(r)(r) Form of Stock Option Agreement

10-Q 001-04423

10(r)(r) March 10, 2008

for Registrant’s 2004 Stock Incentive
Plan.*

10(s)(s) Form of Special Performance-Based
Cash Incentive Notification Letter.*

8-K 001-04423

10.1

May 20, 2008

174

Exhibit
Number

Exhibit Description

Form

File No.

Exhibit(s)

Filing Date

Incorporated by Reference

10(t)(t) Form of Option Agreement for

10-Q 001-04423

10(t)(t)

June 6, 2008

Registrant’s 2000 Stock Plan.*

10(u)(u) Form of Common Stock Payment
Agreement for Registrant’s 2000
Stock Plan.*

10-Q 001-04423

10(u)(u)

June 6, 2008

10(v)(v) Third Amendment to the

10-K 001-04423

10(v)(v) December 18, 2008

Registrant’s 2005 Executive Deferred
Compensation Plan, as amended and
restated effective October 1, 2006.*

10(w)(w) Form of Stock Notification and
Award Agreement for awards of
restricted stock units.*

10(x)(x) Form of Stock Notification and
Award Agreement for awards of
performance-based restricted units.*

10(y)(y) Form of Stock Notification  and
Award Agreement for awards of
non-qualified stock options.*

10(z)(z) Form of Stock Notification and
Award Agreement for awards of
restricted stock.*

10-K 001-04423

10(w)(w) December  18, 2008

10-K 001-04423

10(x)(x) December 18, 2008

10-K 001-04423

10(y)(y) December 18,  2008

10-K 001-04423

10(z)(z) December 18, 2008

10(a)(a)(a) Form of Restricted Stock Unit

10-Q 001-04423 10(a)(a)(a) March 10, 2009

Agreement for Registrant’s 2004
Stock Incentive Plan.*

10(b)(b)(b) First Amendment to the Hewlett-
Packard Company Excess Benefit
Retirement Plan.*

10-Q 001-04423 10(b)(b)(b) March  10, 2009

10(c)(c)(c) Fourth Amendment to the

10-Q 001-04423 10(c)(c)(c) June 5, 2009

Registrant’s 2005 Executive Deferred
Compensation Plan, as amended and
restated effective October 1, 2006.*

10(d)(d)(d) Fifth Amendment to the  Registrant’s
2005 Executive Deferred
Compensation Plan, as amended and
restated effective October 1, 2006.*

11 None.

12 Statement of Computation of Ratio
of Earnings to Fixed Charges.‡

13-14 None.

16 None.

18 None.

21 Subsidiaries of the registrant as of

October 31, 2009.‡

10-Q 001-04423 10(d)(d)(d) September 4, 2009

175

Exhibit
Number

22 None.

Exhibit Description

Form

File No.

Exhibit(s)

Filing Date

Incorporated by Reference

23 Consent of Independent Registered

Public Accounting Firm.‡

24 Power of Attorney (included on the

signature page).

31.1 Certification of Chief Executive

Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended.‡

31.2 Certification of Chief Financial

Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended.‡

32 Certification of Chief Executive

Officer and Chief Financial Officer
pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.†

33-35 None.

101.INS XBRL Instance Document.§

101.SCH XBRL Taxonomy Extension Schema

Document.§

101.CAL XBRL Taxonomy Extension

Calculation Linkbase Document.§

101.DEF XBRL Taxonomy Extension

Definition Linkbase Document.§

101.LAB XBRL Taxonomy Extension  Label

Linkbase Document.§

101.PRE XBRL Taxonomy Extension

Presentation Linkbase Document.§

*

‡

†

§

Indicates management contract or compensatory plan,  contract or arrangement.

Filed herewith.

Furnished herewith.

Furnished herewith. In accordance  with Rule 406T of Regulation  S-T,  the information  in these
exhibits shall not be deemed to be ‘‘filed’’ for purposes  of Section 18  of the Exchange Act, or
otherwise subject to liability under that section, and shall not be incorporated  by  reference into
any registration statement or other document  filed under the Securities Act of 1933, as  amended,
except as expressly set forth by specific reference in such  filing.

The registrant agrees to furnish to the Commission supplementally upon  request  a copy of (1)  any
instrument with respect to long-term debt not filed herewith as  to  which the total  amount  of  securities
authorized thereunder does not exceed  10  percent of  the total assets  of  the registrant  and its
subsidiaries on a consolidated basis and (2) any omitted schedules to any material plan of  acquisition,
disposition or reorganization set forth  above.

176

Financial highlights

Revenue

$	in	billions

$34.0

32.0

30.0

28.0

26.0

24.0

22.0

20.0

18.0

Cash flow

$	in	billions

$16.0

14.0

12.0

10.0

8.0

6.0

4.0

2.0

0.0

6
.
3
3
$

8
.
0
3
$

8
.
8
2
$

4
.
7
2
$

6
.
7
2
$

3
.
8
2
$

5
.
8
2
$

3
.
8
2
$

0
.
8
2
$

5
.
5
2
$

4
.
5
2
$

1
.
5
2
$

1Q07		2Q07		3Q07		4Q07		1Q08		2Q08		3Q08		4Q08		1Q09		2Q09		3Q09		4Q09

Cash flow from operations             Free cash flow1

.

6
4
1
$

.

0
2
1
$

.

4
3
1
$

2
.
0
1
$

.

4
1
1
$

4
.
9
$

6
.
9
$

1
.
7
$

0
.
8
$

6
.
6
$

FY05	

FY06	

FY07	

FY08	

FY09

1  Free cash flow equals cash flow from operations less net capital expenditures.

FY09 revenue by segment

Imaging and Printing 
Group

Services 

Personal Systems 
Group	

Enterprise Storage  
and Servers

HP Software

HP Financial  
Services and Other 

21%

31%

30%

13%

3%

2%

FY09 revenue by region

EMEA

Americas
(U.S.	36%,
Canada/ 
Latin	America	8%)

Asia Pacific

44%  
(up 6% Y/Y)

39%  
(down 11% Y/Y)

17%  
(down 7% Y/Y)

	
HP	saved	the	following	resources	by	using	Reincarnation	Matte	(FSC),	made	with	100%	
recycled	fiber	and	50%	post-consumer	waste,	processed	chlorine	free,	designated	Ancient	
Forest	Friendly™,	and	manufactured	with	electricity	that	is	offset	with	Green-e® certified 
renewable	energy	certificates:	25	fully	grown	trees,	11,452	gallons	of	water,	8	million	 
BTUs	of	energy,	695	pounds	of	solid	waste,	and	2378	pounds	of	greenhouse	gases.

Calculations based on research by Environmental Defense Fund and other members of the Paper Task Force.  
www.newleafpaper.com

www.hp.com

©	Copyright	2010	Hewlett-Packard	Development	Company,	L.P.	The	information	contained	herein	is	subject	
to change without notice. The only warranties for HP products and services are set forth in the express 
warranty	statements	accompanying	such	products	and	services.	Nothing	herein	should	be	construed	as	
constituting an additional warranty. HP shall not be liable for technical or editorial errors or omissions 
contained herein.

4AA0-1916ENW,	January	2010