Hewlett-Packard (HPQ)

Performance-based Restricted Units

        In fiscal 2008, HP implemented a program that provides for the issuance of PRUs representing hypothetical shares of HP common stock that may be issued under the Hewlett-Packard Company 2004 Stock Incentive Plan.

        Under the PRU program, a target number of units are awarded at the beginning of each three-year performance period. The number of shares released at the end of the performance period will range from zero to two times the target number depending on performance during the period. The performance metrics of the PRU program are (a) annual targets based on cash flow from operations as a percentage of revenue, and (b) an overall "modifier" based on Total Shareholder Return ("TSR") relative to the S&P 500 over the three-year performance period. TSR is calculated using the quarterly average performance of the S&P 500 during the three-year performance period.

        As the cash flow goals are considered performance conditions, the expense for these awards, net of estimated forfeitures, is recorded over the three-year performance period based on the number of shares that are expected to be earned based on the achievement of the cash flow goals during the performance period.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Stock-Based Compensation (Continued)

        HP estimates the fair value of a target PRU share using the Monte Carlo simulation model, as the TSR modifier contains a market condition. The following weighted-average assumptions were used to determine the weighted-average fair values of the PRU awards:

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Stock-Based Compensation (Continued)

        Outstanding PRUs as of January 31, 2010 and changes during the three months ended January 31, 2010 were as follows:

        At January 31, 2010, there was $608 million of unrecognized pre-tax stock-based compensation expense related to PRUs with an assigned fair value, which HP expects to recognize over the remaining weighted-average vesting period of 1.6 years.

Performance-Based Restricted Units

        In 2007, the Committee approved a new long-term incentive program (the "PRU Program") for HP executives, including the NEOs, for awards beginning in fiscal 2008. Under this program, restricted stock units, referred to as "performance-based restricted units" ("PRUs"), are awarded to eligible employees. Implementation of this program represented an important step taken by HP to drive a high-performance culture. It was also consistent with the direction being taken by some of HP's peer group companies. Fiscal 2009 was the second year that long-term incentive awards were granted to the NEOs under the PRU Program.

        Under the PRU Program, a target number of PRUs is awarded at the beginning of each three-year performance period. The number of shares of HP common stock released at the end of the performance period will range from zero to two times the target number depending on performance during the period. The performance metrics of the PRU Program are (a) annual targets based on cash flow from operations as a percentage of revenue, and (b) an overall "modifier" based on HP's TSR relative to the S&P 500 over the three-year performance period. In determining cash flow from operations as a percentage of revenue for purposes of assessing performance, the Committee has the discretion to make adjustments to cash flow from operations as a percentage of revenue calculated on a GAAP basis to exclude certain events that occur during a performance period, including asset write-downs; litigation or claim judgments or settlements; the effect of changes in tax law, accounting principles or other such laws or provisions affecting reported results; accruals for reorganization and restructuring programs; and other extraordinary non-recurring items. TSR is calculated quarterly during the three-year period using the quarterly average performance of the S&P 500.

        The metric of "cash flow from operations as a percentage of revenue" was used under the prior HP Long-Term Performance Cash Program (the "LTPC Program"), and HP believes that it continues to be a key metric that both drives and demonstrates improved financial performance within the company. It is also a complementary metric to the revenue and net profit metrics used under the PfR Plan. Furthermore, the use of a cash flow metric in a long-term incentive plan prevents executives from being rewarded for taking excessive risk in any particular year because payouts under the plan are based on rolling three-year performance periods.

        The TSR modifier is intended to ensure that there are no payouts or limited payouts under the program if HP's stock performance is below the median TSR of S&P 500 companies for the three-year performance period. Where the annual cash flow goals have been met and where there has been strong relative TSR performance over the three-year performance period, the PRU Program may provide substantial rewards to participants with respect to that performance period. However, even if cash flow goals are achieved in each of the three years, there may be no or limited payouts if HP's stock performance is below that of the median TSR of S&P 500 companies.

        Under the PRU Program, cash flow goals are set at the beginning of each fiscal year, and performance is reviewed at the end of that year. The percentage to be applied to each participant's target award ranges from zero to 150%, based upon the extent to which the annual performance goals are achieved. If HP does not achieve a threshold level of cash flow performance for the year, the amount earned for one-third of the award is zero. If HP achieves a threshold level of cash flow performance for the year, a percentage is applied to one-third of a participant's target award for the period to determine the number of units earned during that year. For example, if an NEO received an award of 90,000 PRUs and cash flow goals were achieved at 150% in the first year, at 100% in the second year and at 75% in the third year, at the end of the three-year performance period, the

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participant would have earned 97,500 PRUs ((30,000 × 150%) + (30,000 × 100%) + (30,000 × 75%) = 97,500).

        At the end of the three-year performance period, the total units earned, if any, are adjusted by applying a modifier based on HP's TSR (including reinvestment of dividends) relative to the TSR of S&P 500 companies for the three-year period. If HP's TSR is in the bottom quartile of the S&P 500, the modifier will be zero, and no shares will be released with respect to that three-year performance period. If HP's TSR is at the median of the S&P 500, the modifier will be 100%, and the number of shares released will equal the number of units earned during the period with respect to annual cash flow performance. If HP's TSR is at or above the 75^th percentile of S&P 500 companies for the period, the maximum modifier of 133% will apply, and the number of shares released will equal 133% of the number of units earned during the period with respect to annual cash flow performance.

        To achieve the maximum payout (200% of the initial PRU award), HP must achieve the maximum cash flow goals for each of the three years, and HP's TSR must meet or exceed the 75^th percentile of the TSRs of S&P 500 companies for that period. Award values will reflect changes in stock price (both increases and decreases) over the three-year period because awards are denominated in stock units payable in shares. For example, if a participant was credited with 97,500 PRUs at the end of the performance period and HP's TSR for that three-year period was at the 80^th percentile of the S&P 500, a total of 129,675 shares of HP common stock would be released to the participant for that period (97,500 × 133% = 129,675).

        At its January 2009 meeting, the Committee set the PRU cash flow goals for fiscal 2009. Goals are set based on prior-year performance, and because record cash-flow performance was achieved in fiscal 2008, achieving the goals for fiscal 2009 required significant achievement in an uncertain economic environment. As with the PfR targets set for 2009, these targets were set at a time when the full extent of the economic downturn that had begun in the fall of 2008 was not known.

        At its November 2009 meeting, the Committee reviewed HP's actual cash flow from operations as a percentage of revenue and certified that performance was achieved at 100.94% of target. Accordingly, PRU Program participants were credited with 100.94% of the units attributable to the second-year of the fiscal 2008 grant (one-third of the total units granted in fiscal 2008), and 100.94% of the units attributable to the first year of the fiscal 2009 grant (one-third of the total units granted in fiscal 2009). Whether these or any units earned in subsequent years will be paid out in shares at the end of any three-year performance period will depend on HP's TSR during that period, which is not determinable until the end of the period.

Performance-based Restricted Units

        HP estimated the fair value of a target PRU share using the Monte Carlo simulation model, as the TSR modifier contains a market condition. The following weighted-average assumptions were used to determine the weighted-average fair values of the PRU awards for fiscal years ended October 31:

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Note 2: Stock-Based Compensation (Continued)

        Outstanding PRUs as of October 31, 2009 and 2008 and changes during fiscal 2009 and 2008 were as follows:

        At October 31, 2009, there was $193 million of unrecognized pre-tax stock-based compensation expense related to PRUs with an assigned fair value, which HP expects to recognize over the remaining weighted-average vesting period of 1.5 years. At October 31, 2008, there was $108 million of unrecognized pre-tax stock-based compensation expense related to PRUs with an assigned fair value, which HP expected to recognize over the remaining weighted-average vesting period of 2.0 years.

Performance-based Restricted Units

        In fiscal 2008, HP implemented a program that provides for the issuance of PRUs representing hypothetical shares of HP common stock that may be issued under the Hewlett-Packard Company 2004 Stock Incentive Plan.

        Under the PRU program, a target number of units are awarded at the beginning of each three-year performance period. The number of shares released at the end of the performance period will range from zero to two times the target number depending on performance during the period. The performance metrics of the PRU program are (a) annual targets based on cash flow from operations as a percentage of revenue, and (b) an overall "modifier" based on Total Shareholder Return ("TSR") relative to the S&P 500 over the three-year performance period. TSR is calculated using the quarterly average performance of the S&P 500 during the three-year performance period.

        As the cash flow goals are considered performance conditions, the expense for these awards, net of estimated forfeitures, will be recorded over the three-year performance period based on the number of shares that are expected to be earned based on the achievement of the cash flow goals during the performance period.

        HP estimates the fair value of a target PRU share using the Monte Carlo simulation model, as the TSR modifier contains a market condition. There were no PRUs granted during the three months

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Stock-Based Compensation (Continued)

ended April 30, 2009 and 2008. The following weighted-average assumptions were used to determine the weighted-average fair value of the PRU awards:

⁽¹⁾

Reflects the weighted-average fair value for the second year of the three-year performance period applicable to PRUs granted in fiscal 2008 and for the first year of the three-year performance period applicable to PRUs granted in fiscal 2009. The estimated fair value of a target share for the third year for PRUs granted in fiscal 2008 and for the second and third years for PRUs granted in fiscal 2009 will be determined when the annual cash flow goals are approved, and the expense will be amortized over the remainder of the applicable three-year performance period.

⁽²⁾

HP uses historic volatility for PRU awards as implied volatility cannot be used when simulating multivariate prices for companies in the S&P 500.

        Outstanding PRUs as of April 30, 2009 and October 31, 2008 and changes during the six months ended April 30, 2009 and twelve months ended October 31, 2008 were as follows (shares in thousands):

        At April 30, 2009, there was $286 million of unrecognized pre-tax stock-based compensation expense related to PRUs with an assigned fair value, which HP expects to recognize over the remaining weighted-average period of 2.0 years.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Stock-Based Compensation (Continued)

Performance-based Restricted Units

        In fiscal 2008, HP implemented a program that provides for the issuance of PRUs representing hypothetical shares of HP common stock that may be issued under the Hewlett-Packard Company 2004 Stock Incentive Plan.

        Under the PRU program, a target number of units are awarded at the beginning of each three-year performance period. The number of shares released at the end of the performance period will range from zero to two times the target number depending on performance during the period. The performance metrics of the PRU program are (a) annual targets based on cash flow from operations as a percentage of revenue, and (b) an overall "modifier" based on Total Shareholder Return ("TSR") relative to the S&P 500 over the three-year performance period. TSR is calculated using the quarterly average performance of the S&P 500 during the three-year performance period.

        As the cash flow goals are considered performance conditions, the expense for these awards, net of estimated forfeitures, will be recorded over the three-year performance period based on the number of shares that are expected to be earned based on the achievement of the cash flow goals during the performance period.

10

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Stock-Based Compensation (Continued)

        HP estimates the fair value of a target PRU share using the Monte Carlo simulation model, as the TSR modifier contains a market condition. The following weighted-average assumptions were used to determine the fair values of the PRU awards:

⁽¹⁾

Reflects the weighted-average fair value for the second year of the three-year performance period applicable to PRUs granted in fiscal 2008 and for the first year of the three-year performance period applicable to PRUs granted in fiscal 2009. The estimated fair value of a target share for the third year for PRUs granted in fiscal 2008 and for the second and third years for PRUs granted in fiscal 2009 will be determined when the annual cash flow goals are approved, and the expense will be amortized over the remainder of the applicable three-year performance period.

⁽²⁾

HP uses historic volatility for PRU awards as implied volatility cannot be used when simulating multivariate prices for companies in the S&P 500.

        Outstanding PRUs as of January 31, 2009 and October 31, 2008 and changes during the three months ended January 31, 2009 were as follows (shares in thousands):

        At January 31, 2009, there was $320 million of unrecognized pre-tax stock-based compensation expense related to PRUs with an assigned fair value, which HP expects to recognize over the remaining weighted-average period of 2.2 years.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Stock-Based Compensation (Continued)

Performance-based Restricted Units

        In 2007, the Committee approved a new long-term incentive program (the "PRU Program") for HP executives, including the NEOs, for awards beginning in fiscal 2008. Under this program, restricted stock units, called "Performance-based Restricted Units" ("PRUs"), are awarded to eligible employees. Implementation of this new program represents a further step being taken by HP to drive a high-performance culture. It is also consistent with the direction being taken by some of HP's peer companies.

        Under the PRU Program, a target number of units are awarded at the beginning of each three-year performance period. The number of shares released at the end of the performance period will range from zero to two times the target number depending on performance during the period. The performance metrics of the PRU Program are (a) annual targets based on cash flow from operations as a percentage of revenue, and (b) an overall "modifier" based on HP's Total Shareholder Return ("TSR") relative to the S&P 500 over the three-year performance period. TSR is calculated using the quarterly average performance of the S&P 500 during the three-year period.

        The metric of "cash flow from operations as a percentage of revenue" was used under the prior HP Long-Term Performance Cash Program (the "LTPC Program"), and HP believes that it continues to be a key metric that reflects improved financial performance within the company. It is also a complementary metric to the revenue and net profit metrics used under the PfR Plan. Furthermore, the use of a cash flow metric in a long-term incentive plan prevents executives from being rewarded for taking excessive risk in any particular year since payout under the plan is based on rolling three-year performance periods.

        The TSR modifier, also used under the LTPC Program, is intended to ensure that there are no or limited payouts under the program if HP's stock performance is below the median TSR of S&P 500 companies for the three-year performance period. Where the annual cash flow goals have been met and where there has been strong relative TSR performance over the three-year performance period, the structure of the PRU Program may provide substantial rewards to participants with respect to that performance period. However, even if cash flow goals are achieved in each of the three years, there may be no or limited payouts if HP's stock performance is below that of the median TSR of S&P 500 companies.

        Under the PRU Program, cash flow goals are set at the beginning of each fiscal year, and performance is reviewed at the end of that year. The percentage to be applied to each participant's target award ranges from zero to 150%, based upon the extent to which the annual performance goals are achieved. If HP does not achieve a threshold level of cash flow performance for the year, the amount earned is zero. If HP achieves a threshold level of cash flow performance for the year, a percentage is applied to one-third of a participant's target award for the period to determine the number of units earned during that year. For example, if an NEO received an award of 90,000 PRUs in 2008 and cash flow goals were achieved at 150% in the first year, at 100% in the second year and at 75% in the third year, at the end of the three-year performance period, the participant would have earned 97,500 PRUs ((30,000 × 150%) + (30,000 × 100%) + (30,000 × 75%) = 97,500).

        At the end of the three-year performance period, the total units earned, if any, are adjusted by applying a modifier based on HP's TSR (including reinvestment of dividends) relative to the TSRs of S&P 500 companies for the three-year period. To achieve a modifier above 100% for the three-year

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period, HP's TSR must exceed the median for S&P 500 companies; to achieve the maximum payout, HP must achieve the maximum cash flow goals for each of the three years, and HP's TSR must exceed the 75^th percentile of the TSRs of S&P 500 companies for that period. Award values will reflect changes in stock price (both increases and decreases) over the three-year period because awards are denominated in stock units payable in shares. For example, if a participant was credited with 97,500 PRUs at the end of the performance period, and HP's TSR for that three-year period was at the 63^rd percentile of the S&P 500, a total of 114,075 shares of HP common stock would be released to the participant for that period (97,500 × 117% = 114,075).

        At its January 2008 meeting, the Committee set the PRU cash flow goals for fiscal 2008. Goals are set based on prior-year performance, and, because record cash-flow performance was achieved in fiscal 2007, achieving the goals for fiscal 2008 required significant and sustained performance over the period.

        At its November 2008 meeting, the Committee reviewed HP's actual cash flow from operations as a percentage of revenue and certified that performance was achieved at 150% of target. Accordingly, PRU Program participants were credited with units for the first year of the performance period equivalent to 1.5 times one-third of the units in the original 2008 grant. Whether these or any units earned in subsequent years will be paid out in shares at the end of the three-year performance period will depend on HP's TSR during that period, which is not determinable until the end of the period.

Performance-based Restricted Units

        HP estimated the fair value of a target PRU share using the Monte Carlo simulation model, as the TSR modifier contains a market condition. The estimated fair value of each target share for the current year was $40.21. The estimated fair value of a target share for the second and third years of the three-year performance period will be determined when the cash flow performance goal is set for each of the next two annual performance periods and the expense will be amortized over the remainder of the three-year performance period. The estimated expense, net of forfeitures, is based on the Monte Carlo fair value and is updated for the achievement of the cash flow performance goal for that year at the end of each reporting period.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Note 2: Stock-Based Compensation (Continued)

        The following assumptions were used to determine the fair value of the PRU awards for the first year:

⁽¹⁾

HP uses historic volatility for PRU awards as implied volatility cannot be used when simulating multivariate prices for companies in the S&P 500.

        Nonvested performance-based restricted units as of October 31, 2008 were as follows:

        As of October 31, 2008, $108 million of total unrecognized compensation cost related to performance-based restricted units for the first year is expected to be recognized over a weighted-average period of 2.0 years.

Performance-based Restricted Units

        HP estimated the fair value of a target PRU share using the Monte Carlo simulation model, as the TSR modifier contains a market
condition. The estimated fair value of each target share for the current year was $40.21. The estimated fair value of a target share for the second and third years of the three-year
performance period will be determined when the cash flow performance goal is set for each of the next two annual performance periods and the expense will be amortized over the remainder of the
three-year performance period. The estimated expense, net of forfeitures, is based on the Monte Carlo fair value and is updated for the achievement of the cash flow performance goal for
that year at the end of each reporting period.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Note 2: Stock-Based Compensation (Continued)

        The
following assumptions were used to determine the fair value of the PRU awards for the first year:

⁽¹⁾

HP
uses historic volatility for PRU awards as implied volatility cannot be used when simulating multivariate prices for companies in the
S&P 500.

        Nonvested
performance-based restricted units as of October 31, 2008 were as follows:

        As
of October 31, 2008, $108 million of total unrecognized compensation cost related to performance-based restricted units for the first year is expected to be recognized
over a weighted-average period of 2.0 years.