Hewlett-Packard (HPQ)

Imaging and Personal Systems Group

        In the first quarter of fiscal 2005, we combined the Imaging and Printing Group and the Personal Systems Group into one organization known as the Imaging and Personal Systems Group ("IPSG"). Each of the business segments of IPSG is described in more detail below.

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Imaging and Personal Systems Group

        In order to maximize efficiency, accelerate time to market and intensify competitive focus, we combined the Imaging and Printing Group and the Personal Systems Group into one organization known as the Imaging and Personal Systems Group ("IPSG"). This builds on the collaboration already established between the two business segments. Each of the business segments of IPSG is described in more detail below.

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Personal Systems Group

        The components of weighted average net revenue growth by business unit were as follows:

        On a constant currency basis, PSG's net revenue increased 7% for the three months ended January 31, 2005, as compared to the same period in the prior year. For the three months ended January 31, 2005, the favorable currency impact was due primarily to the weakening of the dollar against the euro. Net revenue increased across all businesses and regions and was the result primarily of an overall 12% volume increase. Volume increases were the result of strong growth in the consumer and commercial markets, our re-entry into the China market, strong growth in Intel-based personal workstations, the introduction of new digital entertainment products such as the Apple iPod from HP, entertainment notebooks, converged devices and broader product line offerings in pen-based iPaqs. The PSG volume increase was moderated by a slight decline in ASPs with commercial clients, which includes workstations, and consumer clients experiencing declines of 1% and 7%, respectively. The ASP decline was due to component cost declines and was offset partially by a strong monitor attach rate in commercial PCs. Year-over-year net revenue increases in desktop and notebook PCs were 8% and 9%, respectively, while commercial clients and consumer clients net revenue increased 11% and 7%, respectively, from the prior-year comparable period.

        PSG's earnings from operations as a percentage of net revenue increased 1.1 percentage points for the three months ended January 31, 2005, compared to the same period in fiscal 2004. The increase is the result of a gross margin improvement of 0.6 percentage points and a decline in operating expenses as a percentage of net revenue of 0.5 percentage points. The gross margin improvement is due primarily to reduced warranty expense, component cost declines and improvements in supply chain costs and increased option attach rates which carry higher gross margins. The operating expense decline as a percentage of net revenue for the period is the result of a combination of increased net revenue and the effect of continued cost control measures.

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Imaging and Personal Systems Group

The Imaging and Personal Systems Group (IPSG), which was formed in mid-January, consists of the Personal Systems Group (PSG) and the Imaging and Printing Group (IPG). IPSG reported first quarter revenue of $12.9 billion, up 7% year-over-year. Operating profit for the first quarter totaled $1.1 billion, or 8.3% of revenue, compared to $1.0 billion, or 8.5% of revenue, in the prior-year period.

“The formation of the Imaging and Personal Systems Group provides us with a unique opportunity to leverage the strengths of both groups into one unified business,” said Vyomesh (VJ) Joshi, executive vice president, Imaging and Personal Systems Group, HP. “Today, our combined organization has a stronger focus on business and customer solutions that enables us to accelerate profitable growth and strengthen our market position.”