Hewlett-Packard (HPQ)

Gross Margin

        Total HP gross margin decreased by 0.6 percentage points for the three months ended January 31, 2010 as compared to the prior-year period. This decline was a result of strong growth in personal computer and printer hardware revenues that have lower gross margins, the effect of which was partially offset by cost improvements in services.

        PSG gross margin declined for the three months ended January 31, 2010 primarily as a result of ASPs declining at a faster pace than component costs combined with a mix shift towards lower-end products.

        For the three months ended January 31, 2010, IPG gross margin declined due primarily to the unfavorable impact of a mix shift from higher-margin supplies to lower-margin hardware products, the effect of which was partially offset by improvements in commercial hardware margins.

        ESS gross margin decreased for the three months ended January 31, 2010 due primarily to product mix shifts, the effect of which was partially offset by the benefits from lower product unit costs and favorable currency impacts.

        For the three months ended January 31, 2010, HP Software gross margin increased slightly due primarily to a stronger support revenue mix.

        The gross margin in Corporate Investments and Other increased for the three months ended January 31, 2010 primarily as a result of lower product costs for our network infrastructure products.

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        The gross margin in our Services segment increased for the three months ended January 31, 2010 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.

        HPFS gross margin increased for the three months ended January 31, 2010 primarily as a result of higher portfolio margins due to favorable financing conditions and improved interest rates for rollover debts.

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:

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.

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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)

        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.

Gross Margin

        The weighted components of the gross margin decline as compared to the prior-year periods were as follows:

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        Total company gross margin decreased for both the second quarter and first six months of fiscal 2009 as compared to the same periods in the prior year.

        The decrease in ESS gross margin for the three and six months ended April 30, 2009 was due primarily to unfavorable currency impacts in all of the business units, product mix shifts and competitive pricing.

        Services gross margin increased slightly for the three months ended April 30, 2009 due to improved cost management, the effect of which was partially offset by the mix effect from the acquisition of the EDS business, which has lower gross margins. Services gross margin decreased slightly for the six months ended April 30, 2009 due to the mix effect from the acquisition of EDS, the effect of which was partially offset by second quarter cost improvements.

        Gross margin in Corporate Investments and Other declined in the three and six months ended April 30, 2009 as a result of a unit volume decline in the sale of network infrastructure products.

        The improvements in HP Software gross margin for the three and six months ended April 30, 2009 resulted primarily from a favorable revenue mix with more higher-margin support revenue and less lower-margin services revenue, the effect of which was partially offset by lower license mix.

        PSG gross margin declined in the second quarter and first half of fiscal 2009. The gross margin decline in PSG for both periods was the result primarily of ASPs declining at a faster pace than component costs and a mix shift towards lower-end products, the effect of which was partially offset by lower warranty and supply chain costs.

        The increases in IPG gross margin for the three and six months ended April 30, 2009 resulted primarily from an increase in the supplies mix and supplies price increases, the effect of which was partially offset by hardware margin declines.

        The HPFS gross margin decline for the three and six months ended April 30, 2009 was due primarily to unfavorable currency movements and lower remarketing and buyout margins. The HPFS gross margin decline for the six months ended April 30, 2009 was also due to higher bad debt expenses.

Gross Margin

        The weighted components of the change in gross margin as a percentage of net revenue as compared to the prior-year period were as follows:

        The Services contribution to the overall decline in HP gross margin and the decline in Services gross margin on a year-over-year basis was a result of a mix impact from the acquisition of the EDS business, which has lower gross margins. Each of the Services business units experienced an increase in gross margin in the first quarter of fiscal 2009 compared to the prior-year period.

        The decrease in ESS gross margin was due primarily to competitive pricing, business mix shifts, and unfavorable currency impacts in all of the business units, as well as a product mix shift to entry level products in business critical systems.

        Gross margin in Corporate Investments and Other declined as a result of a volume decline.

        PSG gross margin declined in the first quarter of fiscal 2009, despite its positive contribution to the overall change in HP gross margin. The gross margin decline in PSG was the result primarily of ASPs declining at a faster pace than component costs, and a mix shift toward lower-end models.

        The increase in IPG gross margin was driven primarily by favorable impacts from an increased supplies mix and supplies price increases.

        The improvement in HP Software gross margin resulted primarily from a favorable revenue mix with more higher-margin support revenue and less lower-margin services revenue.

        The HPFS gross margin decline was due primarily to higher bad debt expenses and lower margins in used equipment sales.

Gross Margin

        The weighted-average components of the change in gross margin as compared to prior-year periods were as follows for the following fiscal years ended October 31:

        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 HPS and HPFS and flat gross margin growth across our remaining segments.

        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.

        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.

        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.

        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.

        HPS gross margin declined in fiscal 2008 from the prior year due primarily to the acquisition of EDS in the fourth quarter. Without the impact of the EDS acquisition, HPS gross margin would have increased for the fiscal year.

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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)

        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.

        Total company gross margin increased slightly in fiscal 2007 from fiscal 2006.

        The improvement in HP Software gross margin in fiscal 2007 was due primarily to a favorable change in revenue mix driven by the inclusion of revenue from Mercury licenses and support, which typically have a higher gross margin than the other offerings within the segment.

        During fiscal 2007, ESS contributed unfavorably to our total company's weighted-average change in gross margin while the ESS gross margin remained stable. This stability was due primarily to improved cost management, which was offset by an ongoing mix shift to lower-margin Integrity products within business critical systems and a continued mix shift towards industry standard servers.

        During fiscal 2007, PSG contributed unfavorably to our total company's weighted-average change in gross margin as a result of higher growth than the other segments. However, PSG gross margin increased primarily as a result of component cost declines and improvements in supply chain costs per unit, which were partially offset by ASP declines.

        During fiscal 2007, IPG gross margin decreased due primarily to unfavorable hardware margins, increased costs associated with new product introductions and a change in product mix.

        HPS gross margin increased during fiscal 2007 from fiscal 2006 due primarily to continued focus on cost structure improvements from delivery efficiencies and cost controls. This gross margin increase was partially offset by the impact from the continued competitive pricing environment.

        HPFS gross margin decline during fiscal 2007 was caused primarily by increased bad debt expenses and lower bad debt recoveries, as well as lower margins on leases and used equipment sales.

Gross Margin

        The weighted-average components of the change in gross margin as compared to prior-year periods were as follows for the
following fiscal years ended October 31:

        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 HPS and HPFS and flat gross margin growth across our remaining segments.

        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.

        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.

        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.

        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.

        HPS
gross margin declined in fiscal 2008 from the prior year due primarily to the acquisition of EDS in the fourth quarter. Without the impact of the EDS acquisition, HPS gross margin
would have increased for the fiscal year.

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HREF="#bg72001a_main_toc">Table of Contents

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

        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.

        Total
company gross margin increased slightly in fiscal 2007 from fiscal 2006.

        The
improvement in HP Software gross margin in fiscal 2007 was due primarily to a favorable change in revenue mix driven by the inclusion of revenue from Mercury licenses and support,
which typically have a higher gross margin than the other offerings within the segment.

        During
fiscal 2007, ESS contributed unfavorably to our total company's weighted-average change in gross margin while the ESS gross margin remained stable. This stability was due
primarily to improved cost management, which was offset by an ongoing mix shift to lower-margin Integrity products within business critical systems and a continued mix shift towards industry standard
servers.

        During
fiscal 2007, PSG contributed unfavorably to our total company's weighted-average change in gross margin as a result of higher growth than the other segments. However, PSG gross
margin increased primarily as a result of component cost declines and improvements in supply chain costs per unit, which were partially offset by ASP declines.

        During
fiscal 2007, IPG gross margin decreased due primarily to unfavorable hardware margins, increased costs associated with new product introductions and a change in product mix.

        HPS
gross margin increased during fiscal 2007 from fiscal 2006 due primarily to continued focus on cost structure improvements from delivery efficiencies and cost controls. This gross
margin increase was partially offset by the impact from the continued competitive pricing environment.

        HPFS
gross margin decline during fiscal 2007 was caused primarily by increased bad debt expenses and lower bad debt recoveries, as well as lower margins on leases and used equipment
sales.

Gross Margin

        The weighted-average components of the change in gross margin as a percentage of net revenue as compared to the prior-year periods were as follows:

        The improvements in HP Software gross margin for the three and nine months ended July 31, 2008 were due primarily to cost savings in our 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 BTO revenue, which typically has higher gross margins than the remainder of the segment.

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        The improvements in HPS gross margin for both the three and nine months ended July 31, 2008 were due primarily to the continued focus on cost structure improvements from delivery efficiencies and overall cost controls.

        For the third quarter of fiscal 2008, ESS gross margin decreased due primarily to discounting and pricing, partially offset by improved cost management. For the first nine months of fiscal 2008, ESS gross margin increased due primarily to improved cost management, improved higher-margin attach rates, and lower component costs in industry standard servers, the effect of which was partially offset by an ongoing mix shift to lower-margin Integrity products within business critical systems.

        IPG gross margin remained flat for the three and nine months ended July 31, 2008 due primarily to higher hardware discounting and component cost increases, offset by favorable supplies mix and less lower-margin hardware mix.

        For the three and nine months ended July 31, 2008, PSG contributed unfavorably to our total company's weighted-average change in gross margin primarily as a result of a decline in ASPs and as PSG's lower-margin business contributed a greater amount to HP's overall segment revenue mix. For the third quarter of fiscal 2008, PSG gross margin decreased due primarily to ASPs declining at a faster pace than component cost declines, partially offset by lower supply chain costs and an increase in higher-margin option attach rates. For the first nine months of fiscal 2008, PSG gross margin increased due primarily to decreases in supply chain costs, combined with improvements in the higher-margin option attach business.

        HPFS's contribution to our total company's weighted-average change in gross margin was flat for both the three and nine months ended July 31, 2008. HPFS gross margin increased slightly for the three months ended July 31, 2008. HPFS gross margin declined for the first nine months ended July 31, 2008 due primarily to higher bad debt expense as a result of additional reserves and lower recoveries, and lower portfolio margins due to an increase in operating leases in the overall lease mix, the effect of which was partially offset by higher margins associated with end-of-lease, remarketing and buyout activity.

Gross Margin

        The weighted-average components of the change in gross margin as a percentage of net revenue as compared to the prior-year periods were as follows:

        The increase in ESS gross margin for both the three and six months ended April 30, 2008 was due primarily to improved cost management, improved attach rates and lower component costs, the effect of which was partially offset by an ongoing mix shift to lower-margin Integrity products within business critical systems.

        The improvement in HP Software gross margin for the three and six months ended April 30, 2008 was due primarily to cost savings in business technology optimization ("BTO"), cost structure improvement as a result of increased scale in the information management business and, to a lesser

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extent, a favorable change in the revenue mix driven by higher BTO revenue, which typically has a higher gross margin than the remainder of the segment.

        PSG's contribution to our total company's weighted-average change in gross margin was flat for the three months ended April 30, 2008. The year-over-year increase in PSG gross margin for both the three and six months ended April 30, 2008 was due primarily to favorable component pricing, improvements in supply chain costs and increases in attach rates.

        The decline in HPS gross margin for both the three and six months ended April 30, 2008 was due primarily to the impact from the continued competitive pricing environment and increased workforce rebalancing costs.

        The decrease in IPG gross margin for the three months ended April 30, 2008 was due primarily to competitive pricing pressures and unfavorable hardware margins. Gross margin remained flat in the first half of fiscal 2008 driven by improved margins for supplies as a result of product mix offset by unfavorable hardware margins.

        HPFS's contribution to our total company's weighted-average change in gross margin was flat for both the three and six months ended April 30, 2008. The year-over-year decline in HPFS gross margin for both the three and six months ended April 30, 2008 was due primarily to higher bad debt expense as a result of lower recoveries and lower portfolio margins due to an increase in operating leases in the overall lease mix, the effect of which was partially offset by higher margins associated with end-of-lease and remarketing activity.

Gross Margin

        The weighted-average components of the change in gross margin as a percentage of net revenue as compared to prior-year period were as follows:

        Total company gross margin increased 0.8% for the three months ended January 31, 2008, as compared to the same period in the prior year. The increase in ESS gross margin was due primarily to improved cost management and attach rates and lower component costs, which were partially offset by a continued mix shift towards ISS within the segment and the ongoing mix shift to lower-margin Integrity products within business critical systems. The gross margin increase in PSG was due primarily to favorable component pricing, improvement in supply chain costs and increases in the attach rates for monitors and other accessories. The improvement in HP Software gross margin was due primarily to cost savings in BTO business and cost structure improvement as a result of increased scale in the information management business. The HPS gross margin increase was driven mainly by the continued focus on cost structure improvement from delivery efficiencies and overall cost controls, which were partially offset by the impact from the continued competitive pricing environment. IPG's contribution to our total company's weighted-average change in gross margin was flat while the IPG gross margin increased as a result of improved margins for supplies as a result of product mix. HPFS' contribution to our total company's weighted-average change in gross margin was flat while the HPFS gross margin declined due primarily to lower portfolio margins as a result of an increase in the operating lease mix and higher provision for bad debt.

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Gross Margin

        The weighted-average components of the change in gross margin as compared to prior-year periods were as follows for the following fiscal years ended October 31:

        Total company gross margin increased slightly in fiscal 2007 from fiscal 2006. The improvement in HP Software gross margin in fiscal 2007 was due primarily to a favorable change in revenue mix driven by the inclusion of revenue from Mercury licenses and support, which typically have a higher gross margin than the other offerings within the segment. HPS gross margin increased during fiscal 2007 from fiscal 2006 due primarily to continued focus on cost structure improvements from delivery efficiencies and cost controls. This gross margin increase was partially offset by the impact from the continued competitive pricing environment. During fiscal 2007, ESS contributed unfavorably to our total company's weighted-average change in gross margin while the ESS gross margin remained stable. This stability was due primarily to improved cost management, which was offset by an ongoing mix shift to lower-margin Integrity products within business critical systems and a continued mix shift towards industry standard servers. HPFS gross margin decline during fiscal 2007 was caused primarily by increased bad debt expenses and lower bad debt recoveries, as well as lower margins on leases and

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used equipment sales. During fiscal 2007, PSG contributed unfavorably to our total company's weighted-average change in gross margin as a result of higher growth than the other segments. However, PSG gross margin increased primarily as a result of component cost declines and improvements in supply chain costs per unit, which were partially offset by ASP declines. During fiscal 2007, IPG gross margin decreased due primarily to unfavorable hardware margins, increased costs associated with new product introductions and a change in product mix.

        Total company gross margin increased in fiscal 2006 as compared to fiscal 2005. The improvement in ESS gross margin in fiscal 2006 was due primarily to a favorable unit mix, improved discount management, and lower component costs. HPS gross margin increase was driven mainly by the continued focus on cost structure improvement from delivery efficiencies and cost controls, the impact of which was partially offset by the continued competitive environment in the solutions and services business and higher fiscal 2006 bonus accruals. For IPG, gross margin increased in fiscal 2006 due primarily to improved supplies margins and a favorable portfolio mix shift from hardware to supplies, which were partially offset by unfavorable consumer hardware margins. The improvement in HP Software gross margin in fiscal 2006 was due primarily to an increase in revenue and more effective management of the support and services costs for OpenView and OpenCall. The gross margin improvement in PSG resulted primarily from reduced warranty expense and supply chain costs as a percentage of revenue and component cost declines. HPFS gross margin was impacted unfavorably in fiscal 2006 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 in fiscal 2006.