Hewlett-Packard (HPQ)

Imaging and Printing Group

        The components of the weighted net revenue change as compared to the prior-year period by business unit were as follows:

        IPG net revenue increased 3.8% (4.4% when adjusted for currency) for the three months ended January 31, 2010 as compared to the same period in fiscal 2009 reflecting an improvement in market conditions. Net revenue for consumer hardware increased 21% in the first quarter of fiscal 2010 as compared to the same period in fiscal 2009. The net revenue increase in consumer hardware was driven by unit volume growth of 18% in the first quarter of fiscal 2010 from the corresponding period in fiscal 2009. Net revenue for commercial hardware increased 4% in the first quarter of fiscal 2010 as compared to the same period in fiscal 2009. The net revenue increase in commercial hardware was driven primarily by unit volume growth of 11% in the first quarter of fiscal 2010 from the corresponding period in fiscal 2009. Supplies net revenue increased 1% in the first quarter of fiscal 2010 as compared to the same period in fiscal 2009.

        IPG earnings from operations as a percentage of net revenue decreased by 1.5 percentage points for the three months ended January 31, 2010 as compared to the same period in fiscal 2009. The operating margin decline in the first quarter of fiscal 2010 was due primarily to a decrease in gross margin, the effect of which was partially offset by a slight decrease in operating expenses as a percentage of net revenue. The decline in gross margin in the first quarter of fiscal 2010 was due primarily to an unfavorable mix shift from higher-margin supplies towards lower-margin hardware products, the effect of which was partially offset by margin improvements primarily in commercial hardware. The slight decrease in operating expense as a percentage of net revenue in the first quarter of fiscal 2010 was due primarily to continued cost management.

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

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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.

Imaging and Printing Group

        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:

        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

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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.

Imaging and Printing Group

        The components of the weighted net revenue decline as compared to the prior-year periods by business unit were as follows:

        For the three and six months ended April 30, 2009, IPG net revenue decreased 22.6% (19.7% when adjusted for currency) and 20.7% (18.6% when adjusted for currency), respectively, as compared to the prior-year comparable periods, reflecting the impact of the continued global economic slowdown. For the second quarter and first half of fiscal 2009, net revenue for commercial hardware declined 40% and 37%, respectively, from the same periods in fiscal 2008. The net revenue decline in commercial

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hardware was driven by a unit volume decline of 36% and 37% for the three and six months ended April 30, 2009, respectively, due primarily to worldwide market weaknesses impacting both our laser and our graphics businesses. For the second quarter and first half of fiscal 2009, supplies net revenue declined 14% and 11%, respectively, from the same periods in fiscal 2008. The supplies net revenue decline for both periods was across all platforms due to reduced customer spending, the effect of which was partially moderated by supplies price increases. For the three months ended April 30, 2009, the supplies net revenue decline was also due to reductions in channel inventory. For the second quarter and first half of fiscal 2009, net revenue for consumer hardware declined 31% and 35%, respectively, from the same periods in fiscal 2008. The net revenue decline in consumer hardware was driven by a unit volume decline of 23% and 27% for the three and six months ended April 30, 2009, respectively, reflecting the weak demand environment.

        IPG earnings from operations as a percentage of net revenue increased 2.2 and 2.6 percentage points for the three and six months ended April 30, 2009, respectively, as compared to the same periods in fiscal 2008. Operating margin improvement for both periods was a combination of an increase in gross margin and a decrease in operating expense as a percentage of net revenue. The improvement in gross margin for both periods resulted primarily from an increase in the supplies mix and supplies price increases, the effect of which was partially offset by hardware margin declines due to unfavorable currency impacts and declines in average revenue per unit. The decrease in operating expenses as a percentage of net revenue for both periods was due primarily to effective cost controls, including lower compensation expense.

Imaging and Printing Group

        The components of weighted net revenue growth as compared to the prior-year period by business unit were as follows:

        IPG net revenue decreased 18.7% (17.5% when adjusted for currency) for the three months ended January 31, 2009 as compared to the prior-year comparable period due to a decline in economic conditions in the marketplace with customers delaying printer purchases. In the first quarter of fiscal 2009, net revenue for commercial hardware, consumer hardware and supplies declined 34%, 37% and 7%, respectively. The net revenue decline in commercial hardware was across all regions and was driven by a unit volume decline of 39% due to market weaknesses impacting both our laser and our graphics businesses. The net revenue decline in consumer hardware was across all regions as well and was driven by a unit volume decline of 31% reflecting the impact of the current global economic

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slowdown. The decline in supplies net revenue was across all platforms as customers sought to reduce expenses and was partially moderated by supplies price increases.

        Despite the revenue decline, IPG earnings from operations as a percentage of net revenue increased 3.0 percentage points for the three months ended January 31, 2009 as compared to the same period in fiscal 2008. Operating margin improvement in the first quarter of fiscal 2009 was a combination of increased gross margin and decreased operating expenses as a percentage of net revenue. The improvement in gross margin in the first quarter of fiscal 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 decrease in operating expenses as a percentage of net revenue in the first quarter of fiscal 2009 was due primarily to effective cost controls, including lower compensation expense.

Imaging and Printing Group

        The components of weighted-average net revenue growth as compared to prior-year periods by business unit were as follows for the following fiscal years ended October 31:

        IPG net revenue increased 3.2% (decreased 1.1% 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 decrease in commercial hardware net revenue in fiscal 2008 from fiscal 2007 was due mainly to competitive pricing pressures, the effect of which was partially offset by unit volume growth in multifunction printers, color laser printers and large format printing products and revenue from recent acquisitions.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

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

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.

        IPG net revenue increased 6.3% (4.3% when adjusted for currency) in fiscal 2007 from fiscal 2006. The favorable currency impact was due primarily to the movement of the dollar against the euro in fiscal 2007. The growth in printer supplies net revenue in fiscal 2007 from fiscal 2006 reflected higher unit volumes of supplies as a result of the continued expansion of printer hardware placements and the strong performance of supplies for color-related products. The growth in commercial hardware net revenue in fiscal 2007 was attributable mainly to unit volume growth in multifunction printers and revenue from our digital press and large format printing products. The slight increase in consumer hardware net revenue in fiscal 2007 was attributable to increased unit volumes, improved average revenue per unit performance and a mix shift from single function products to All-in-Ones, the impact of which was partially offset by the continued shift in demand to lower priced products and strategic pricing decisions.

        IPG earnings from operations as a percentage of net revenue increased by 0.3 percentage points in fiscal 2007 from fiscal 2006, driven by a decrease in operating expenses as a percentage of net revenue that was partially offset by a decrease in gross margin. Gross margin decreased due primarily to unfavorable hardware margins, increased costs associated with new product introductions and a change in product mix. Operating expenses as a percentage of net revenue decreased due primarily to higher prior-year research and development expenses associated with product introduction costs, coupled with higher revenue and more effective spending controls.

Imaging and Printing Group

        The
components of weighted-average net revenue growth as compared to prior-year periods by business unit were as follows for the following fiscal years ended
October 31:

        IPG
net revenue increased 3.2% (decreased 1.1% 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 decrease in commercial hardware net revenue in fiscal 2008 from fiscal 2007 was due
mainly to competitive pricing pressures, the effect of which was partially offset by unit volume growth in multifunction printers, color laser printers and large format printing products and revenue
from recent acquisitions.

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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)

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.

        IPG
net revenue increased 6.3% (4.3% when adjusted for currency) in fiscal 2007 from fiscal 2006. The favorable currency impact was due primarily to the movement of the dollar against
the euro in fiscal 2007. The growth in printer supplies net revenue in fiscal 2007 from fiscal 2006 reflected higher unit volumes of supplies as a result of the continued expansion of printer hardware
placements and the strong performance of supplies for color-related products. The growth in commercial hardware net revenue in fiscal 2007 was attributable mainly to unit volume growth in
multifunction printers and revenue from our digital press and large format printing products. The slight increase in consumer hardware net revenue in fiscal 2007 was attributable to increased unit
volumes, improved average revenue per unit performance and a mix shift from single function products to All-in-Ones, the impact of which was partially offset by the continued
shift in demand to lower priced products and strategic pricing decisions.

        IPG
earnings from operations as a percentage of net revenue increased by 0.3 percentage points in fiscal 2007 from fiscal 2006, driven by a decrease in operating expenses as a
percentage of net revenue that was partially offset by a decrease in gross margin. Gross margin decreased due primarily to unfavorable hardware margins, increased costs associated with new product
introductions and a change in product mix. Operating expenses as a percentage of net revenue decreased due primarily to higher prior-year research and development expenses associated with
product introduction costs, coupled with higher revenue and more effective spending controls.

Imaging and Printing Group

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        The components of weighted-average net revenue growth as compared to the prior-year periods by business unit were as follows:

        IPG net revenue increased 3.4% (decreased 1.8% when adjusted for currency) and increased 4.6% (decreased 0.1% when adjusted for currency) for the three and nine months ended July 31, 2008, respectively, as compared to the same periods in fiscal 2007. The growth in printer supplies net revenue in the current quarter was due to favorable pricing, higher unit volumes of supplies and installed base growth associated with color-related products. The growth in printer supplies net revenue for the first nine months of fiscal 2008 reflected higher unit volumes of supplies as a result of the strong performance of color-related products. The decrease in commercial hardware net revenue for the current quarter was due primarily to a slowing economy and competitive pricing pressures, partially offset by growth in large format printing products and additional revenue from recent acquisitions. The increase in commercial hardware net revenue for the first nine months ended July 31, 2008 was attributable mainly to unit volume growth in multifunction printers, color laser printers and large format printing products and additional revenue from recent acquisitions. The decrease in consumer hardware net revenue for the three and nine months ended July 31, 2008 were due primarily to discontinued sales of cameras, competitive pricing pressures and slower growth in the overall consumer printing market. The consumer hardware was impacted by the continued shift in demand to lower-priced products and strategic pricing decisions, which caused average revenue per unit to decline for the current quarter.

        For the three and nine months ended July 31, 2008, IPG earnings from operations as a percentage of net revenue increased 0.5 and 0.3 percentage points, respectively, as compared to the same periods in fiscal 2007. The operating margin increases for both periods were due to lower operating expenses as a percentage of net revenue. For the three and nine months ended July 31, 2008, gross margins remained flat due primarily to higher hardware discounting and component cost increases, the effect of which was offset by favorable supplies mix and a reduction in the lower-margin hardware mix. For the three and nine months ended July 31, 2008, the decreases in operating expenses as a percentage of net revenue were due primarily to higher revenue and cost savings in marketing, research and development expenses, the effect of which was partially offset by increased investments in our enterprise printing sales force.