Hewlett-Packard (HPQ)

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.

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Table of Contents

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.

Combined Segment Results

        Services net revenue decreased 11.8% (0.7% when adjusted for currency) and decreased 11.7% (2.4% when adjusted for currency) for the three and six months ended April 30, 2009, respectively, as compared to the prior period combined segment results presented in the table above. Services net revenue for the six months 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 decline was 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. Services net revenue for the three months ended April 30, 2009 as compared to the three months prior period combined segment results reflects a weighted net revenue decline in the infrastructure technology outsourcing, application services, business process outsourcing and technology services business units of 5.9%, 3.1%, 1.5% and 1.3%, respectively. Further, Services net revenue for the six months ended April 30, 2009 as compared to the six month prior period combined segment results reflects a weighted net revenue decline in the infrastructure technology outsourcing, application services, business process outsourcing and technology services business units of 5.9%, 3.4%, 1.7% and 0.7%, respectively.

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        Services earnings from operations as a percentage of net segment revenue increased by 7.5 percentage points and 5.5 percentage points for the three and six months ended April 30, 2009, respectively, as compared to the prior period combined segment results. The operating margin for both periods increased as a result of an increase in gross margin and a decrease in operating expenses as a percentage of net revenue. The gross margin for both periods increased due primarily to the continued focus on cost structure improvements, including delivery efficiencies and cost controls, and to acquisition synergies. The continued improvements in our operating expense structure contributed to the decline in operating expenses as a percentage of net revenue for both periods compared to the prior year.

Combined Segment Results

        Services net revenue decreased 11.5% (3.9% when adjusted for currency) for the three months ended January 31, 2009, as compared to the prior period combined segment results presented in the table above. 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%, 25%, 20% and 9% of revenues, respectively. Further, Services net revenue for the three months ended January 31, 2009 as compared to the prior period combined segment results reflects a weighted net revenue decline in the infrastructure technology outsourcing, application services and business process outsourcing business units of 5.9%, 3.6% and 2.0%, respectively, while net revenue for technology services was relatively flat. The net revenue decline was due primarily to an unfavorable currency impact and lower add-on business due to the slowing economic environment.

        Services earnings from operations as a percentage of net segment revenue increased by 3.4 percentage points for the three months ended January 31, 2009 as compared to the prior period combined segment results. The operating margin increase was the result of an increase in gross margin and a decrease in operating expenses as a percentage of net revenue. The gross margin increase was due primarily to the continued focus on cost structure improvements generated by delivery efficiencies and cost controls. The continued improvements in our operating expense structure contributed to the decline in operating expenses as a percentage of net revenue compared to the prior year.

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