Hewlett-Packard (HPQ)

LIQUIDITY

        We use cash generated by operations as our primary source of liquidity; we believe that internally generated cash flows are generally sufficient to support business operations, capital expenditures and the payment of stockholder dividends, in addition to a level of discretionary investments and share repurchases. We are able to supplement this near-term liquidity, if necessary, with broad access to capital markets and credit line facilities made available by various foreign and domestic financial

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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)

institutions. Our liquidity is subject to various risks including the market risks identified in the section entitled "Qualitative and Quantitative Disclosures about Market Risk" in Item 7A.

        Our cash position remains strong, and we believe our cash balances are sufficient to cover cash outlays expected in fiscal 2010.

LIQUIDITY

        As previously discussed, we use cash generated by operations as our primary source of liquidity, since we believe that internally generated cash flows are sufficient to support business operations, capital expenditures and the payment of stockholder dividends, in addition to a level of discretionary investments and share repurchases. We are able to supplement this near term liquidity, if necessary, with broad access to capital markets and credit line facilities made available by various foreign and domestic financial institutions.

        We maintain debt levels that we establish through consideration of a number of factors, including cash flow expectations, cash requirements for operations, investment plans (including acquisitions), share repurchase activities and the overall cost of capital. Outstanding debt decreased to $5.0 billion as of April 30, 2006 as compared to $5.2 billion at October 31, 2005, bearing weighted average interest rates of 5.0% and 4.7%, respectively. Short-term borrowings increased to $2.6 billion at April 30, 2006 from $1.8 billion at October 31, 2005. The increase reflects primarily the reclassification from long-term to short-term of the $1.0 billion U.S. Dollar Global Notes maturing in December 2006, offset partially by the repayment of the $200 million Series A Medium-Term Notes. During the first half of fiscal 2006, we issued $427 million and repaid $505 million of commercial paper. As of April 30, 2006, we had $41 million in total borrowings collateralized by certain financing receivable assets that were issued during the first half of fiscal 2006.

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        HP, and not the HPFS financing business, issued or assumed the vast majority of our total outstanding debt. Like other financial services companies, HPFS has a business model that is asset-intensive in nature and therefore is more debt-dependent than our other business segments. At April 30, 2006, HPFS had approximately $7.1 billion in net portfolio assets, which include short-and long-term financing receivables and operating lease assets.

        We have revolving trade receivables-based facilities permitting us to sell certain trade receivables to third-parties on a non-recourse basis. The aggregate maximum capacity under these programs was approximately $1.2 billion as of April 30, 2006. The facility with the largest volume is one that is subject to a maximum amount of 525 million euros, or approximately $663 million (the "Euro Program"). Trade receivables of approximately $2.2 billion were sold during the first half of fiscal 2006, including approximately $1.6 billion under the Euro Program. Fees associated with these facilities do not generally differ materially from the cash discounts offered to these customers under the previous alternative prompt payment programs. As of April 30, 2006, there was approximately $509 million available under these programs, of which $311 million related to the Euro Program.

        We have the following resources available to obtain short-term or long-term financings, if we need additional liquidity:

        The securities issuable under the 2002 shelf registration statement include notes with due dates of nine months or more from issuance. Until December 15, 2005, we had two U.S. credit facilities consisting of a $1.5 billion 364-day credit facility expiring in March 2006 and a $1.5 billion 5-year credit facility expiring in March 2009. On December 15, 2005, we replaced the two credit facilities with a $3.0 billion 5-year credit facility. The U.S. credit facility is available for general corporate purposes, including the support of our U.S. commercial paper program. The lines of credit are uncommitted and are available primarily through various foreign subsidiaries.

        Our credit risk is evaluated by three independent rating agencies based upon publicly available information as well as information obtained in our ongoing discussions with them. Standard & Poor's Rating Services, Moody's Investor Service and Fitch Ratings currently rate our senior unsecured long term debt A-, A3 and A and our short-term debt A-1, Prime-1, and F1, respectively. We do not have any rating downgrade triggers that would accelerate the maturity of a material amount of our debt. However, a downgrade in our credit rating would increase the cost of borrowings under our Credit Facilities. Also, a downgrade in our credit rating could limit or, in the case of a significant downgrade, preclude our ability to issue commercial paper under our current programs. If this occurs, we would seek alternative sources of funding, including the issuance of notes under our existing shelf registration statement and our Euro Medium-Term Note Programme or our credit facility.

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        In May 2006, we filed a shelf registration statement with the SEC for the sale of debt securities, common stock, preferred stock, depositary shares and warrants. On May 23, 2006, we issued $1.0 billion Floating Rate Global Notes under this registration statement. We expect to use the proceeds to repay at maturity our 5.25% Euro Medium-Term Notes due July 2006. The remainder of the net proceeds will be used for general corporate purposes.

Contractual Obligations

        At April 30, 2006, our unconditional purchase obligations are approximately $2.3 billion, compared with $2.1 billion as previously reported in our Annual Report on Form 10-K for the fiscal year ended October 31, 2005. Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty. These purchase obligations are related principally to cost of sales, inventory and other items.

Funding Commitments

        We previously disclosed in our Consolidated Financial Statements for the year ended October 31, 2005 that we expected to contribute approximately $245 million to our pension plans, approximately $40 million to cover benefit payments to U.S. non-qualified plan participants and approximately $80 million to cover benefit claims for our post-retirement benefit programs. As of April 30, 2006, we have made approximately $175 million and $28 million of contributions to non-U.S. pension plans and U.S. non-qualified plan participants, respectively, and paid $25 million to cover benefit claims for post-retirement benefit plans. We presently anticipate making additional contributions of between $80 million and $100 million to our qualified and non-qualified pension plans and expect to pay $40 million to cover benefit claims for post-retirement plans during the remainder of fiscal 2006. Our funding policy is to contribute cash to our pension plans so that we meet at least the minimum contribution requirements, as established by local government and funding and taxing authorities. We expect to use contributions made to the post-retirement plans primarily for the payment of retiree health claims incurred during the fiscal year.

        We expect to make significant cash outlays associated with our restructuring plans during fiscal 2006. As a result of our approved restructuring plans, we expect future cash expenditures of $950 million. The majority of this amount is recorded on our Consolidated Condensed Balance Sheet at April 30, 2006. We intend to expense $13 million in future periods as we incur the costs or we meet the requirements to record the costs as a liability. We expect to make cash payments of approximately $400 million during the remainder of fiscal 2006 and the remaining amount of $550 million over the next five fiscal years.

Off-Balance Sheet Arrangements

        As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities ("SPEs"), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of April 30, 2006, we are not involved in any material unconsolidated SPEs.

Indemnifications

        In the ordinary course of business, we enter into contractual arrangements under which we may agree to indemnify the third-party to such arrangement from any losses incurred relating to the services they perform on behalf of us or for losses arising from certain events as defined within the particular

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contract, which may include, for example, litigation or claims relating to past performance. Such indemnification obligations may not be subject to maximum loss clauses. Historically, payments we have made related to these indemnifications have been immaterial.

LIQUIDITY

        As previously discussed, we use cash generated by operations as our primary source of liquidity, since we believe that internally generated cash flows are sufficient to support business operations, capital expenditures and the payment of stockholder dividends, in addition to a level of discretionary investments and share repurchases. We are able to supplement this near term liquidity, if necessary, with broad access to capital markets and credit line facilities made available by various foreign and domestic financial institutions.

        We maintain debt levels that we establish through consideration of a number of factors, including cash flow expectations, cash requirements for operations, investment plans (including acquisitions), share repurchase activities and the overall cost of capital. Outstanding debt decreased to $5.0 billion as of January 31, 2006 as compared to $5.2 billion at October 31, 2005, bearing weighted average interest rates of 4.8% and 4.7%, respectively. Short-term borrowings increased to $2.6 billion at January 31, 2006 from $1.8 billion at October 31, 2005. The increase reflects primarily the reclassification from long-term to short-term of the $1.0 billion U.S. Dollar Global Notes maturing in December 2006, offset partially by the repayment of the $200 million Series A Medium-Term Notes. During the first three months of fiscal 2006, we issued $267 million and repaid $287 million of commercial paper. During the first quarter of 2006, we issued $47 million in total borrowings collateralized by certain financing receivable assets.

        HP, and not the HPFS financing business, issued or assumed the vast majority of our total outstanding debt. Like other financial services companies, HPFS has a business model that is asset-intensive in nature and therefore is more debt-dependent than our other business segments. At January 31, 2006, HPFS had approximately $7.1 billion in net portfolio assets, which include short-and long-term financing receivables and operating lease assets.

        We have revolving trade receivables-based facilities permitting us to sell certain trade receivables to third parties on a non-recourse basis. The aggregate maximum capacity under these programs was approximately $1.2 billion as of January 31, 2006. The facility with the largest volume is one that is subject to a maximum amount of 525 million euros, or approximately $638 million (the "Euro Program"). Trade receivables of approximately $2.1 billion were sold during the first quarter of fiscal 2006, including approximately $1.4 billion under the Euro Program. Fees associated with these facilities do not generally differ materially from the cash discounts offered to these customers under the previous alternative prompt payment programs. As of January 31, 2006, there was approximately $532 million available under these programs, of which $386 million relates to the Euro Program.

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        We have the following resources available to obtain short-term or long-term financings, if we need additional liquidity:

        The securities issuable under the 2002 shelf registration statement include notes with due dates of nine months or more from issuance. Until December 15, 2005, we had two U.S. credit facilities consisting of a $1.5 billion 364-day credit facility expiring in March 2006 and a $1.5 billion 5-year credit facility expiring in March 2009. On December 15, 2005, we replaced the two credit facilities with a $3.0 billion 5-year credit facility. The U.S. credit facility is available for general corporate purposes, including the support of our U.S. commercial paper program. The lines of credit are uncommitted and are available primarily through various foreign subsidiaries.

        Our credit risk is evaluated by three independent rating agencies based upon publicly available information as well as information obtained in our ongoing discussions with them. Standard & Poor's Rating Services, Moody's Investor Service and Fitch Ratings currently rate our senior unsecured long term debt A-, A3 and A and our short-term debt A-1, Prime-1, and F1, respectively. We do not have any rating downgrade triggers that would accelerate the maturity of a material amount of our debt. However, a downgrade in our credit rating would increase the cost of borrowings under our Credit Facilities. Also, a downgrade in our credit rating could limit or, in the case of a significant downgrade, preclude our ability to issue commercial paper under our current programs. If this occurs, we would seek alternative sources of funding, including the issuance of notes under our existing shelf registration statement and our Euro Medium-Term Note Programme or our credit facility.

Contractual Obligations

        At January 31, 2006, our unconditional purchase obligations are approximately $2.2 billion, compared with $2.1 billion as previously reported in our Annual Report on Form 10-K for the fiscal year ended October 31, 2005. Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty. These purchase obligations are related principally to cost of sales, inventory and other items.

Funding commitments

        During fiscal 2006, we estimate that we will contribute approximately $245 million to our pension plans, approximately $40 million to cover benefit payments to U.S. non-qualified plan participants and approximately $80 million to cover benefit claims for our post-retirement benefit programs. As of January 31, 2006, we have made approximately $144 million and $26 million of contributions to our

54

non-U.S. pension plans and U.S. non-qualified plan participants, respectively, and have paid $15 million to cover benefit claims for post-retirement benefit plans. Our funding policy is to contribute cash to our pension plans so that we meet at least the minimum contribution requirements, as established by local government and funding and taxing authorities. We expect to use contributions made to the post-retirement plans primarily for the payment of retiree health claims incurred during the fiscal year.

        We expect to make significant cash outlays associated with our restructuring plans during fiscal 2006. As a result of our approved restructuring plans, we expect future cash expenditures of $1.1 billion. The majority of this amount is recorded on our Consolidated Condensed Balance Sheet at January 31, 2006. We intend to expense $20 million in future periods as we incur the costs or we meet the requirements to record the costs as a liability. We expect to make cash payments of approximately $900 million during the remainder of fiscal 2006 and approximately $200 million over the next five fiscal years.

Off-Balance Sheet Arrangements

        As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities ("SPEs"), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of January 31, 2006, we are not involved in any material unconsolidated SPEs.

Indemnifications

        In the ordinary course of business, we enter into contractual arrangements under which we may agree to indemnify the third party to such arrangement from any losses incurred relating to the services they perform on behalf of us or for losses arising from certain events as defined within the particular contract, which may include, for example, litigation or claims relating to past performance. Such indemnification obligations may not be subject to maximum loss clauses. Historically, payments we have made related to these indemnifications have been immaterial.

LIQUIDITY

        As previously discussed, we use cash generated by operations as our primary source of liquidity, since we believe that internally generated cash flows are sufficient to support business operations, capital expenditures and the payment of stockholder dividends, in addition to a level of discretionary investments and share repurchases. We are able to supplement this near term liquidity, if necessary, with broad access to capital markets and credit line facilities through various foreign subsidiaries as well as with U.S. financial institutions.

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        We maintain debt levels that we establish through consideration of a number of factors, including cash flow expectations, cash requirements for operations, investment plans (including acquisitions), share repurchase activities and the overall cost of capital. Outstanding debt at April 30, 2005 and at October 31, 2004 was $7.2 and $7.1 billion, respectively, bearing weighted average interest rates of 5.3% for both periods. Short-term borrowings increased to $2.8 billion at April 30, 2005 from $2.5 billion at October 31, 2004. The increase primarily reflects $200 million of Series A Medium-Term Notes maturing in December 2005. In addition, during the first half of fiscal 2005, we issued $5.7 billion and repaid $5.8 billion of commercial paper. We did not issue long-term debt during the first half of fiscal 2005.

        HP, and not the HPFS financing business, issued or assumed the vast majority of HP's total outstanding debt. Like other financial services companies, HPFS has a business model that is asset-intensive in nature and therefore is more debt-dependent than our other business segments. At April 30, 2005, HPFS had approximately $7.1 billion in net portfolio assets, which include short- and long-term financing receivables and operating lease assets.

        We have revolving trade receivables-based facilities permitting us to sell certain trade receivables to third parties on a non-recourse basis. The facility with the largest volume is one that is subject to a maximum amount of 525 million euros (approximately $689 million) based on receivables not yet collected by the third party (the "Euro Program"). Trade receivables of approximately $4.0 billion were sold during the first half of fiscal 2005, including approximately $2.7 billion under the Euro Program. The aggregate receivables sold but not yet collected by the third parties were approximately $615 million at April 30, 2005, of which approximately $300 million related to the Euro Program. Fees associated with these facilities do not generally differ materially from the cash discounts offered to these customers under the alternative prompt payment programs.

        We have the following resources available to obtain short-term or long-term financings, if we need additional liquidity:

        The securities issuable under the 2002 registration statement include notes with due dates of nine months or more from issuance. HP uses U.S. credit facilities for general corporate purposes, including to support our U.S. commercial paper program. In April 2005, HP increased its U.S. commercial paper program to $6 billion. HP renewed its $1.5 billion 364-day credit facility that expired on March 11, 2005 with a $1.5 billion 364-day credit facility expiring in March 2006. The lines of credit are uncommitted and are available primarily through various foreign subsidiaries.

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        HP's credit risk is evaluated by three independent rating agencies based upon publicly available information as well as information obtained in our ongoing discussions with them. Standard & Poor's Rating Services, Moody's Investor Service and Fitch Ratings currently rate our senior unsecured long term debt A-, A3 and A and our short-term debt A-1, Prime-1, and F1, respectively. We do not have any rating downgrade triggers that would accelerate the maturity of a material amount of our debt. However, a downgrade in our credit rating would increase the cost of borrowings under our Credit Facilities. Also, a downgrade in our credit rating could limit or, in the case of a significant downgrade, preclude our ability to issue commercial paper under our current programs. If this occurs, we would seek alternative sources of funding, including the issuance of notes under our existing shelf registration statement and our Euro Medium-Term Note Programme or our Credit Facilities.

Contractual Obligations

        At April 30, 2005, our unconditional purchase obligations are approximately $1.1 billion, compared with $1.0 billion as previously reported in our Annual Report on Form 10-K for the fiscal year ended October 31, 2004. Our unconditional purchase obligation at April 30, 2005 included a settlement agreement with EMC pursuant to which HP agreed to pay $325 million (the net amount of the valuation of EMC's claims against HP less the valuation of HP's claims against EMC) to EMC, which HP can satisfy through the purchase for resale or internal use of complementary EMC products in equal installments of $65 million, over the next five years. In addition, if EMC purchases HP products during the five year period, HP will be required to make an equivalent amount of additional product or services purchases from EMC of up to an aggregate of $108 million.

Funding commitments

        We estimate that we will contribute a total of approximately $910 million to the pension and post-retirement plans during fiscal 2005, of which we have already funded $815 million in the six months ended April 30, 2005. Our funding policy is to contribute cash to our pension plans so that we at least meet the minimum contribution requirements, as established by local government funding and taxing authorities. In the current fiscal year, we will continue to contribute cash to our global pension plans in amounts that are consistent with local funding requirements and tax considerations.

        In connection with our March 2002 acquisition of Indigo, HP issued approximately 53 million non-transferable contingent value rights ("CVRs") that entitle each holder to a one-time contingent cash payment of up to $4.50 per CVR, based on the achievement of certain cumulative revenue results over a three-year period that ended on March 31, 2005. We have not incurred a liability associated with the CVRs as of April 30, 2005 and, based on our estimate of such revenue results, we do not expect any material payments in the future.

Off-Balance Sheet Arrangements

        As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities ("SPEs"), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of April 30, 2005, we are not involved in any material unconsolidated SPE transactions.

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Indemnifications

        In the ordinary course of business, HP enters into contractual arrangements under which HP may agree to indemnify the third party to such arrangement from any losses incurred relating to the services they perform on behalf of HP or for losses arising from certain events as defined within the particular contract, which may include, for example, litigation or claims relating to past performance. Such indemnification obligations may not be subject to maximum loss clauses. Historically, payments made related to these indemnifications have been immaterial.

LIQUIDITY

        As previously discussed, we use cash generated by operations as our primary source of liquidity, since we believe that internally generated cash flows are sufficient to support business operations, capital expenditures and the payment of stockholder dividends, in addition to a level of discretionary investments and share repurchases. We are able to supplement this near term liquidity, if necessary, with broad access to capital markets and credit line facilities through various foreign subsidiaries as well as with U.S. financial institutions.

        We maintain debt levels that we establish through consideration of a number of factors, including cash flow expectations, cash requirements for operations, investment plans (including acquisitions), share repurchase activities and the overall cost of capital. Outstanding debt at January 31, 2005

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increased slightly to $7.2 billion as compared to $7.1 billion at fiscal year end 2004, bearing weighted average interest rates of 5.2% and 5.3%, respectively. Short-term borrowings increased to $2.8 billion at January 31, 2005 from $2.5 billion at October 31, 2004. The increase reflects $200 million of Series A Medium-Term Notes maturing in 2005. In addition, during the first quarter of fiscal 2005, we issued $685 million and repaid $675 million of commercial paper. We did not issue long-term debt during the first quarter of fiscal 2005.

        We have revolving trade receivables-based facilities permitting us to sell certain trade receivables to third parties on a non-recourse basis. The facility with the largest volume is one that is subject to a maximum amount of 525 million euros (approximately $690 million) based on receivables not yet collected by the third party (the "Euro Program"). Trade receivables of approximately $1.8 billion were sold during the first quarter of fiscal 2005, including approximately $1.2 billion under the Euro Program. The aggregate receivables sold but not yet collected by the third parties were approximately $334 million at January 31, 2005, of which approximately $241 million related to the Euro Program. Fees associated with these facilities do not generally differ materially from the cash discounts offered to these customers under the alternative prompt payment programs.

        We have the following resources available to obtain short-term or long-term financings, if we need additional liquidity:

        The securities issuable under the 2002 registration statement include notes with due dates of nine months or more from issuance. HP uses U.S. credit facilities for general corporate purposes, including to support our U.S. commercial paper program. HP renewed the 364-day facility expiring on March 11, 2005 with a facility of the same size with a one year duration. The lines of credit are uncommitted and are primarily available through various foreign subsidiaries.

        We do not have any rating downgrade triggers that would accelerate the maturity of a material amount of our debt. However, a downgrade in our credit rating would increase the cost of borrowings under our Credit Facilities. Also, a downgrade in our credit rating could limit or, in the case of a significant downgrade, preclude our ability to issue commercial paper under our current programs. If this occurs, we would seek alternative sources of funding, including the issuance of notes under our existing shelf registration statement and our Euro Medium-Term Note Programme or our Credit Facilities.

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        HP, and not the HPFS financing business, issued or assumed the vast majority of HP's total outstanding debt. HPFS is a financial services organization and, like other financial services companies, has a business model that is asset-intensive in nature and therefore is more debt-dependent than our other business segments. At January 31, 2005, HPFS had approximately $7.2 billion in net portfolio assets, which include short- and long-term financing receivables and operating lease assets.

Contractual Obligations

        At January 31, 2005, our unconditional purchase obligations are approximately $827 million, compared with $1.0 billion as previously reported in our Annual Report on Form 10-K for the fiscal year ended October 31, 2004.

Funding commitments

        We estimate that we will contribute a total of approximately $920 million to the pension and post-retirement plans during fiscal 2005, of which we have already funded $555 million in the three months ended January 31, 2005. Our funding policy is to contribute cash to our pension plans so that we meet the minimum contribution requirements, as established by local government funding and taxing authorities. In the current fiscal year, we will continue to contribute cash to our global pension plans in amounts that are consistent with local funding requirements and tax considerations.

        We issued approximately 53 million non-transferable contingent value rights ("CVRs") in connection with our acquisition of Indigo, N.V. that entitle each holder to a one-time contingent cash payment of up to $4.50 per CVR, based on the achievement of certain cumulative revenue results over a three-year period. The future cash pay-out, if any, of the CVRs will be payable after a three-year period that began on April 1, 2002 and could result in a maximum obligation of $237 million. We have not incurred a liability associated with CVRs as of January 31, 2005, and we do not expect any material cash payments in the future.

Off-Balance Sheet Arrangements

        As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities ("SPEs"), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of January 31, 2005, we are not involved in any material unconsolidated SPE transactions.

Indemnifications

        In the ordinary course of business, HP enters into contractual arrangements under which HP may agree to indemnify the third party to such arrangement from any losses incurred relating to the services they perform on behalf of HP or for losses arising from certain events as defined within the particular contract, which may include, for example, litigation or claims relating to past performance. Such indemnification obligations may not be subject to maximum loss clauses. Historically, payments made related to these indemnifications have been immaterial.