Hewlett-Packard (HPQ)

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.

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.

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.

HP Financial Services

        HPFS net revenue increased by 12% in fiscal 2007 from fiscal 2006. The net revenue increase was due primarily to operating lease growth and higher end-of-lease activity. The financing lease growth and increased used equipment sales, to a lesser extent, also contributed to the revenue growth.

        HPFS earnings from operations as a percentage of net revenue decreased by 0.5 percentage point in fiscal 2007 from fiscal 2006 due primarily to a decrease in gross margin, which was partially offset by

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a decrease in operating expense as a percentage of net revenue. The gross margin decrease was driven primarily by increased bad debt expenses and lower bad debt recoveries, as well as lower margins on leases and used equipment sales. The decline in operating expenses as a percentage of net revenue was due to continued cost controls.

        HPFS net revenue decreased by 1% in fiscal 2006 from fiscal 2005. The net revenue decrease was due primarily to lower used equipment sales and other end-of-lease revenue, which were largely offset by a higher mix of leases classified as operating leases.

        In fiscal 2006, the 3.0 percentage point decrease in earnings from operations as a percentage of net revenue consisted of a decrease in gross margin, which was partially offset by a decrease in operating expense as a percentage of net revenue. The gross margin decline was due primarily to competitor pricing pressures, a higher mix of lower margin operating lease assets and lower recoveries for bad debts, the impact of which was partially offset by lower credit losses. The decrease in operating expenses as a percentage of net revenue was the result of cost savings achieved through continued cost controls.

Financing Originations

        New financing originations, which represent the amounts of financing provided to customers for equipment and related software and services, and include intercompany activity, increased 11% in fiscal 2007 from fiscal 2006. The increase reflects higher financing associated with HP product sales resulting from improved integration and engagement with HP's sales efforts and a favorable currency impact. Financing originations decreased 3% in fiscal 2006 from fiscal 2005 with the decrease reflecting lower financing associated with HP product sales.

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.

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        The portfolio assets and ratios derived from the segment balance sheet for HPFS were as follows for the following fiscal years ended October 31:

⁽¹⁾

Portfolio assets include gross financing receivables of approximately $5.4 billion at October 31, 2007 and $4.9 billion at October 31, 2006 and net equipment under operating leases of $1.8 billion at October 31, 2007 and $1.5 billion at October 31, 2006, as disclosed in Note 10 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference. Portfolio assets also include capitalized profit on intercompany equipment transactions of approximately $500 million at October 31, 2007 and $400 million at October 31, 2006, and intercompany leases of approximately $700 million at October 31, 2007 and $500 million at October 31, 2006, both of which are eliminated in consolidation.

⁽²⁾

HPFS debt consists of intercompany equity that is treated as debt for segment reporting purposes, intercompany debt and debt issued directly by HPFS.

        Portfolio assets at October 31, 2007 increased 15% from October 31, 2006. The increase resulted from a favorable currency impact and a high level of financing originations in fiscal 2007. The overall percentage of portfolio assets reserved decreased due primarily to the write-off of assets covered by specific reserves. HPFS funds its operations mainly through a combination of intercompany debt and equity.

HP Financial Services

        HPFS net revenue decreased by 1% in fiscal 2006 compared to fiscal 2005. The net revenue decrease was due primarily to lower used equipment sales and other end-of-lease revenue, which were largely offset by a higher mix of leases classified as operating leases.

        In fiscal 2006, the 3.0 percentage point decrease in earnings from operations as a percentage of net revenue consisted of a decrease in gross margin, which was partially offset by a decrease in operating expense as a percentage of net revenue. The gross margin decline was due primarily to competitor pricing pressures, a higher mix of lower margin operating lease assets and lower recoveries for bad debts, which were partially offset by lower credit losses. The decrease in operating expenses as a percentage of net revenue was the result of cost savings achieved through continued cost controls.

        HPFS net revenue increased 11% in fiscal 2005 compared to fiscal 2004. The net revenue increase was the result primarily of higher used equipment sales and a higher mix of leases classified as operating leases.

        In fiscal 2005, the 3.5 percentage point increase in earnings from operations as a percentage of net revenue consisted of an increase in gross margin, which was partially offset by an increase in operating expense as a percentage of net revenue. The gross margin increase resulted primarily from lower bad debt expense, which was partially offset by a higher mix of lower margin operating lease assets. The decrease in bad debt expense was due in part to the release in fiscal 2005 of $40 million of reserves related to aged receivables in EMEA that have since been collected. The reserves were established in the fourth quarter of fiscal 2004. Recoveries from accounts in Latin America previously written-off, lower credit losses and a reduction of reserves resulting from a stronger portfolio risk profile also contributed to the decrease in bad debt expense.

        The slight increase in operating expense as a percentage of net revenue in fiscal 2005 was the result mainly of a $62 million net reduction in revenue resulting from the reclassification of certain leases from operating leases to capital leases. This reclassification was the result of a review of the leasing portfolio for appropriate lease classification.

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Financing Originations

        New financing originations, which represent the amounts of financing provided to customers for equipment and related software and services, and include intercompany activity, decreased 3% in fiscal 2006 from fiscal 2005. The decrease reflects lower financing associated with HP product sales. Financing originations increased 7% in fiscal 2005 from fiscal 2004 due to higher financing of HP product sales and a favorable 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:

⁽¹⁾

Portfolio assets include financing receivables of approximately $4.9 billion at October 31, 2006 and $5.0 billion at October 31, 2005 and net equipment under operating leases of $1.5 billion at October 31, 2006 and $1.3 billion at October 31, 2005, as disclosed in Note 10 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference. Portfolio assets also include capitalized profit on intercompany equipment transactions of approximately $400 million at both October 31, 2006 and October 31, 2005, and intercompany leases of approximately $500 million at October 31, 2006 and $400 million at October 31, 2005, both of which are eliminated in consolidation.

⁽²⁾

HPFS debt consists of intercompany equity that is treated as debt for segment reporting purposes, intercompany debt and debt issued directly by HPFS.

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        Portfolio assets at October 31, 2006 increased 4% from October 31, 2005. The increase resulted from a favorable currency impact and a high level of financing originations in the fourth quarter. The overall percentage of portfolio assets reserved decreased due primarily to the write-off of assets covered by specific reserves and lower reserves resulting from a stronger portfolio risk profile.

        HPFS funds its operations mainly through a combination of intercompany debt and equity. The increase in the debt to equity ratio reflects a planned increase in portfolio leverage.

Financial Services

HP Financial Services (HPFS) reported revenue of $519 million, an increase of 6% year-over-year. Financing volume increased 10% over the prior year period, and net portfolio assets grew 4%. Operating profit was $35 million, or 6.7% of revenue, down from a profit of $58 million, or 11.9% of revenue, in the prior year period.

HP Financial Services

        For the three months ended January 31, 2006, the decrease in HPFS net revenue from the prior-year comparable period was the result primarily of lower used equipment sales. An unfavorable currency impact and lower other end of lease revenue also contributed to the decrease.

        For the three months ended January 31, 2006, the 0.4 percentage point decrease in earnings from operations as a percentage of net revenue consisted of a 0.1 percentage point decrease in gross margin and a 0.3 percentage point increase in operating expense. The gross margin decline was driven by lower margins from end of lease activities, including used equipment sales, which were largely offset by lower bad debt expense. The decrease in bad debt expense was due to lower credit losses and a reduction of reserves resulting from a stronger portfolio risk profile. The increase in operating expenses as a percentage of net revenue was the result of the revenue decrease exceeding cost savings achieved through continued cost controls.

Financing Originations

        New financing originations, which include intercompany activity, decreased 10% in the first quarter of fiscal 2006 compared to the same period in fiscal 2005. The decrease resulted from lower financing originations in Asia Pacific and select European countries.

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

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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 Condensed Financial Statements.

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

⁽¹⁾

Portfolio assets include financing receivables of $5.0 billion, both at January 31, 2006 and October 31, 2005, and net equipment under operating leases of $1.4 billion at January 31, 2006 and $1.3 billion at October 31, 2005, as disclosed in Note 8 to the Consolidated Condensed Financial Statements. Portfolio assets at January 31, 2006 and at October 31, 2005 also include approximately $400 million of capitalized profit on intercompany equipment transactions and approximately $400 million in intercompany leases, both of which are eliminated in consolidation.

⁽²⁾

HPFS debt consists of intercompany equity that is treated as debt for segment reporting purposes, intercompany debt and debt issued directly by HPFS.

        Portfolio assets at January 31, 2006 increased 2% from October 31, 2005. The increase resulted primarily from a favorable currency impact. The overall percentage of portfolio assets reserved decreased due primarily to the write-off of assets covered by specific reserves and lower reserves resulting from a stronger portfolio risk profile.

        HPFS funds its operations mainly through a combination of intercompany debt and equity. The increase in the debt to equity ratio reflects a planned increase in portfolio leverage.

Roll-forward of Reserves:

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Financial Services

HP Financial Services (HPFS) reported revenue of $496 million, a decrease of 11% year-over-year. Finance volume and net portfolio assets declined 10% and 2% respectively. Operating profit was $38 million, or 7.7% of revenue, down from a profit of $45 million, or 8.1% of revenue, in the prior-year period.

HP Financial Services

        HPFS net revenue increased 11% in fiscal 2005 compared to fiscal 2004. The net revenue increase was the result primarily of higher used equipment sales and a higher mix of leases classified as operating leases.

        In fiscal 2005, the 3.5 percentage point increase in earnings from operations as a percentage of net revenue consisted of a 3.6 percentage point increase in gross margin partially offset by a 0.1 percentage point increase in operating expense. The gross margin increase resulted primarily from lower bad debt expense, which was offset partially by a higher mix of lower margin operating lease assets. The decrease in bad debt expense was due in part to the release in fiscal 2005 of $40 million of reserves related to aged receivables in EMEA that have since been collected. The reserves were established in the fourth quarter of fiscal 2004. Recoveries from accounts in Latin America previously written-off, lower credit

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losses and a reduction of reserves resulting from a stronger portfolio risk profile also contributed to the decrease in bad debt expense.

        The slight increase in operating expense as a percentage of net revenue was the result mainly of a $62 million net reduction in revenue resulting from the reclassification of certain leases from operating leases to capital leases. This reclassification was the result of a review of the leasing portfolio for appropriate lease classification that HP completed in the fourth quarter.

        HPFS net revenue decreased 1% in fiscal 2004 compared to fiscal 2003. The decrease resulted primarily from lower average levels of revenue-generating assets and lower used equipment sales. The decrease in average assets was due to portfolio amortization and asset sales exceeding new lease originations throughout most of the fiscal year. Lower interest rates also contributed to the net revenue decrease.

        In fiscal 2004, the 2.5 percentage point increase in earnings from operations as a percentage of net revenue consisted of a 1.3 percentage point increase in gross margin and a 1.2 percentage point decrease in operating expense. The gross margin improvement was the result of higher portfolio profitability resulting primarily from end of lease transactions and, to a lesser extent, lower interest costs as a percentage of net revenue. The gross margin increase was offset in part by higher reserves related to certain aged receivables, particularly in EMEA, in the fourth quarter of fiscal 2004. Cost savings achieved through continued cost controls, offset in part by an unfavorable currency impact, caused the decline in operating expenses as a percentage of net revenue.

Financing Originations

        New financing originations, which include intercompany activity, increased 7% in fiscal 2005 from fiscal 2004. The increase resulted from improved integration and engagement with HP's sales and marketing efforts and a favorable currency impact. Originations increased 2% in fiscal 2004 from fiscal 2003 due to higher levels of financing in Asia Pacific and a favorable currency impact, which were offset in part by a lower penetration rate of HP sales.

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 HP's internal management reporting system. The accounting policies used to derive these amounts are substantially the same as those used by HP on a consolidated basis. However, certain intercompany loans and accounts that are reflected in the segment balances are eliminated in HP's Consolidated Financial Statements.

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        The portfolio assets and ratios derived from the segment balance sheet for HPFS were as follows for the following fiscal years ended October 31:

⁽¹⁾

Portfolio assets include financing receivables of $5.0 billion at October 31, 2005 and $5.3 billion at October 31, 2004 and net equipment under operating leases of $1.3 billion at October 31, 2005 and $1.4 billion at October 31, 2004, as disclosed in Note 9 of the Consolidated Financial Statements in Item 8, which is incorporated herein by reference. Portfolio assets also include capitalized profit on intercompany equipment transactions of approximately $400 million at both October 31, 2005 and October 31, 2004 and intercompany leases of approximately $400 million at October 31, 2005 and $300 million at October 31, 2004, both of which are eliminated in consolidation.

⁽²⁾

HPFS debt consists of intercompany equity that is treated as debt for segment reporting purposes, intercompany debt and debt issued directly by HPFS.

        Portfolio assets at October 31, 2005 decreased 4% from October 31, 2004. The decrease resulted primarily from collections of billed receivables, a decline in the exchange rate between the euro and the dollar and the write-off of assets covered by specific reserves. The overall percentage of portfolio assets reserved decreased due primarily to the write-off of assets covered by specific reserves, the release of $40 million of reserves for aged receivables in EMEA that have since been collected and lower reserves resulting from a stronger portfolio risk profile.

        HPFS funds its operations mainly through a combination of intercompany debt and equity. The increase in the debt to equity ratio reflects a planned increase in portfolio leverage.

HP Financial Services

        For the three months ended January 31, 2005, the increase in HPFS net revenue from the prior-year comparable period was the result primarily of a significant increase in operating leases and higher levels of used equipment sales.

        For the three months ended January 31, 2005, the 1.5 percentage point increase in earnings from operations, as a percent of net revenue, consisted of a 2.7 percentage point decrease in operating expense offset partially by a 1.2 percentage point decline in gross margin. The decline in operating expenses as a percentage of net revenue was the result of cost savings achieved through continued cost controls, which were offset in part by unfavorable currency impacts. The gross margin decline was driven by a higher mix of lower margin operating lease assets, which was offset partially by lower bad debt expense and lower interest costs.

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Financing Originations

        New financing originations increased 25% in the first quarter of 2005 compared to the same period in fiscal 2004. The increase resulted from improved integration and engagement with HP's sales and marketing efforts.

Portfolio Assets and Ratios

        HPFS is a financial services organization and, as such, 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 HP's 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 HP's Consolidated Condensed Financial Statements. The portfolio assets and ratios derived from the segment balance sheet for HPFS were as follows:

⁽¹⁾

Portfolio assets include financing receivables of $5.3 billon and net equipment under operating leases of $1.4 billion, both at January 31, 2005 and October 31, 2004, as disclosed in Note 6 of the Consolidated Condensed Financial Statements. Portfolio assets at January 31, 2005 and at October 31, 2004 also include approximately $400 million of capitalized profit on intercompany equipment transactions and approximately $300 million in intercompany leases, both of which are eliminated in consolidation.

        Portfolio assets at January 31, 2005 increased 1% from October 31, 2004. The increase resulted from higher financing originations and a favorable currency impact. The overall percentage of portfolio assets reserved decreased due primarily to the write-off of assets covered by specific reserves.

        HPFS funds its operations mainly through a combination of intercompany debt and working capital. The portfolio assets and ratios are derived from the segment balance sheet.

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Roll-forward of Financing Receivables-related Reserve:

Financial Services

HP Financial Services (HPFS) reported revenue of $555 million, up 26% year-over-year. Finance volume, a leading indicator of future revenue, grew 25% over the prior-year period and net portfolio assets increased by 3% to $7.2 billion. Operating profit was $45 million, or 8.1% of revenue, up from $29 million in the prior-year period.

HP Financial Services

        HPFS net revenue decreased 1% in fiscal 2004 compared to fiscal 2003. The decrease resulted primarily from lower average levels of revenue-generating assets and lower used equipment sales. The decrease in average assets was due to portfolio amortization and asset sales exceeding new lease originations throughout most of the year. Lower interest rates also contributed to the net revenue decrease.

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        In fiscal 2004, the 2.5 net percentage point increase in the earnings from operations ratio consisted of a 1.3 percentage point increase in gross margin and a 1.2 percentage point decrease in operating expense as a percentage of net revenue. The gross margin improvement was driven by higher portfolio profitability resulting primarily from end of lease transactions and, to a lesser extent, lower interest costs as a percentage of net revenue. The gross margin increase was offset in part by higher reserves related to certain aged receivables, particularly in Europe, the Middle East and Africa ("EMEA") in the fourth quarter of fiscal 2004. Cost savings achieved through continued cost controls, offset in part by an unfavorable currency impact, caused the decline in operating expenses as a percentage of net revenue.

        The acquisition of Compaq caused a substantial portion of the fluctuation in HPFS operating results in fiscal 2003 as compared to fiscal 2002. The acquisition resulted in higher revenue-generating assets; however, a slowdown in lease originations moderated the net revenue increase. In fiscal 2003, earnings from operations as a percentage of net revenue improved from fiscal 2002 due to a significant reduction in bad debt expense, coupled with a decline in interest costs as a percentage of net revenue.

Financing Originations

        New financing originations increased 2% in fiscal 2004 compared to fiscal 2003. The increase resulted from higher levels of financing in Asia Pacific and a favorable currency impact, offset in part by a lower penetration rate of HP sales. Originations increased 8% in fiscal 2003 from fiscal 2002 due to the acquisition of Compaq. The impacts of strengthened credit controls, weakness in the global economy and lower average selling prices of HP products offset in part the increase in originations.

Portfolio Assets and Ratios

        HPFS is a financial services organization and, as such, 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 HP's 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 HP's Consolidated Financial Statements. A reconciliation of segment assets to consolidated total assets

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is included in Note 18 of the Consolidated Financial Statements in Item 8. The portfolio assets and ratios derived from the segment balance sheet for HPFS were as follows at October 31:

⁽¹⁾

Portfolio assets include financing receivables of $5.3 billion and net equipment under operating leases of $1.4 billion as disclosed in Note 9 of the Consolidated Financial Statements in Item 8, as well as approximately $400 million of capitalized profit on intercompany equipment transactions and approximately $300 million of intercompany leases, both of which are eliminated in consolidation.

        Portfolio assets at October 31, 2004 increased 3% from the end of fiscal 2003. The increase resulted from higher financing originations and a favorable currency impact. The percentage of portfolio assets reserved increased in fiscal 2004 primarily due to higher reserves related to certain aged receivables in EMEA, offset in part by the write-off of assets covered by specific reserves.

        HPFS funds its operations mainly through a combination of intercompany debt and working capital. The portfolio assets and ratios are derived from the segment balance sheet. The increase in the debt to equity ratio reflects a planned increase in portfolio leverage.