Hewlett-Packard (HPQ)

Personal Systems Group

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

        PSG net revenue increased 20.4% (17.5% when adjusted for currency) for the three months ended January 31, 2010 as compared to the same period in fiscal 2009. The revenue increase was the result of a recovering U.S. PC market combined with continued strength in China and other emerging markets. PSG unit volume and net revenue increased across all business units except the handhelds business unit for the first quarter of fiscal 2010. The unit volume increase in notebook PCs was due in part to growth of the HP and Compaq mini notebooks. For the first quarter of fiscal 2010, net revenue for notebook PCs increased 25%, while net revenue for desktop PCs increased 16% from the prior-year period. Workstations revenue increased 13% while handhelds revenue declined 56% from the prior-year period. Net revenue for consumer clients increased 26% while net revenue for commercial clients increased 16% from the prior-year period. The net revenue increase in Other PSG was related primarily to increased sales of third-party options, support services and extended warranties. PSG net revenue was also impacted by ASP declines. ASPs in consumer clients declined 8% while ASPs in commercial clients increased slightly. ASPs declined from the prior-year period due primarily to a competitive pricing environment combined with a mix shift toward lower-end models. The ASP decline was offset slightly by an increase in the option and monitor attach rates.

        PSG earnings from operations as a percentage of net revenue for the three months ended January 31, 2010 were 5.0%, which was consistent with the percentage reported in the prior-year period. PSG earnings from operations were impacted by a gross margin decline 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 supply chain and warranty costs and improvements in the option attach business. Offsetting the decline in gross margin was a decrease in operating expenses

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as a percentage of net revenue primarily due to continued effective cost controls and operating leverage benefits from increased volume.

Personal Systems Group

        PSG is the leading provider of personal computers ("PCs") in the world based on unit volume shipped and annual revenue. PSG provides commercial PCs, consumer PCs, workstations, handheld computing devices, calculators and other related accessories, software and services for the commercial and consumer markets. We group commercial desktops, commercial notebooks and workstations into commercial clients and consumer desktop and consumer notebooks into consumer clients when describing our performance in these markets. Like the broader PC market, PSG continues to experience a shift toward mobile products such as notebooks. Both commercial and consumer PCs are based predominately on the Windows® operating system and use Intel and AMD processors.

        Commercial PCs.    PSG offers a variety of personal computers optimized for commercial uses, including enterprise and SMB customers, and for connectivity and manageability in networked environments. These commercial PCs include primarily the HP Compaq business desktops, notebooks, tablet PCs, mini notebooks and mobile workstations, as well as the thin clients, retail point of sale systems, displays and the new TouchSmart all-in-one PC for business.

        Consumer PCs.    Consumer PCs include the HP and Compaq series of multi-media consumer desktops, notebooks and mini notebooks, including the TouchSmart line of touch-enabled all-in-one desktops and notebooks.

        Workstations.    Workstations are individual computing products designed for users demanding enhanced performance, such as computer animation, engineering design and other programs requiring high-resolution graphics. PSG provides workstations that run on both Windows® and Linux-based operating systems.

        Handheld Computing.    PSG provides a series of HP iPAQ Pocket PC handheld computing devices that run on Windows® Mobile software. These products range from basic PDAs to advanced "smartphone" devices with voice and data capability.

Personal Systems Group

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

        PSG net revenue decreased 18.6% (15.5% when adjusted for currency) for the first quarter of fiscal 2009 as compared to the same period in fiscal 2008. The revenue decline is the result of the

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overall slowdown in the global economy, including a reversing trend in the growth of emerging markets. PSG net revenue decreased across all geographies and all businesses. Unit volumes decreased by 4% for the first quarter of fiscal 2009 as compared to the same period in fiscal 2008. An increase in notebook PC volumes was more than offset by declines in desktop PCs, workstations, and handheld devices. The unit volume increase in notebook PCs was due in part to growth of the HP and Compaq MiniNote PCs. Net revenue for notebook PCs decreased 13%, while net revenue for desktop PCs decreased 25% from the prior-year period. Handheld revenue declined 35% from the prior-year period. Net revenue for consumer clients decreased 18%, while net revenue for commercial clients decreased 19% from the prior-year period. The net revenue increase in Other PSG was related primarily to increased sales of extended warranties and third-party branded options. The PSG unit volume decrease was intensified by ASP declines of 17% in consumer clients and 16% in commercial clients. ASPs declined from the prior-year period as a result of a competitive pricing environment, component cost reductions and the impact of currency combined with a mix shift toward lower-end models and a decline in the monitor attach rate.

        PSG earnings from operations as a percentage of net revenue decreased by 0.8 percentage points for the first quarter of fiscal 2009 compared to the same period in fiscal 2008. The decrease was due primarily to a decrease in gross margin, which was partially offset by a decline in operating expenses as a percentage of net revenue. The decline in gross margin was the result primarily of ASPs declining at a faster pace than component costs and a mix shift toward lower-end models, the effect of which was partially offset by lower warranty and supply chain costs and an increase in higher-margin option attach rates. The decline in operating expenses as a percentage of net revenue was the result of continued cost controls, including lower compensation expense.

Personal Systems 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:

        PSG net revenue increased 16.2% (10.8% when adjusted for currency) in fiscal 2008 from fiscal 2007. Unit volumes increased by 22% in fiscal 2008 as compared to fiscal 2007. The unit volume increase was the result of strong growth in notebooks, with continued strength in emerging markets. In fiscal 2008, net revenue for notebook PCs increased 28% while net revenue for desktop PCs increased 5% from the prior-year period. In fiscal 2008, net revenue for consumer clients increased 19%, while net revenue for commercial clients increased 15% from the prior-year period. The net revenue increase in Other PSG in fiscal 2008 was related primarily to increased sales of third-party branded options and extended warranties. The revenue increase was partially offset by a decline in handhelds revenue driven by product transition within converged devices. In fiscal 2008, the positive revenue impact from the PSG unit volume increase compared to fiscal 2007 was also moderated by a 7% decline in commercial client ASPs and a 4% decline in consumer client ASPs. ASPs declined from the prior year as a result of price erosion related to component cost reductions and a competitive pricing environment, the effect of which was partially offset by an increased notebook mix and improved attach rates for monitors and other options.

        PSG earnings from operations as a percentage of net revenue increased by 0.3 percentage points in fiscal 2008 from fiscal 2007 as a result of a decrease in operating expenses as a percentage of net revenue combined with a flat gross margin. Gross margin performance was a result of declining ASPs offset by an increase in the attach rate of higher-margin options. The operating expense decline as a percentage of net revenue in fiscal 2008 was the result primarily of the increased net revenue and continued efforts to improve our cost structure through efficiency measures.

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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 net revenue increased 24.8% (20.6% when adjusted for currency) in fiscal 2007 from fiscal 2006. Unit volumes increased by 28% in fiscal 2007, driving double-digit net revenue growth across all regions. The unit volume increase was the result of strong growth in notebooks, with significant improvements in emerging markets. In fiscal 2007, net revenue for notebook PCs increased 47% while net revenue for desktop PCs increased 9% from the prior-year period. In fiscal 2007, net revenue for consumer clients increased 39%, while net revenue for commercial clients increased 16% from the prior-year period. The net revenue increase in Other PSG in fiscal 2007 was related primarily to improvements in extended warranty sales. The revenue increase was partially offset by decreases in handhelds revenue due to declines in the PDA product market, which were partially offset by our new converged device and travel companion products. In fiscal 2007, the positive revenue impact from the PSG unit volume increase compared to fiscal 2006 was also moderated by a 5% decline in commercial client ASPs and a 1% decline in consumer client ASPs. The decline in ASPs from the prior year was a result of price erosion related to component cost reductions, the impact of which was partially offset by increased notebook mix and monitor attach rates.

        PSG earnings from operations as a percentage of net revenue increased by 1.4 percentage points in fiscal 2007 from fiscal 2006 as a result of decreases in operating expenses as a percentage of net revenue coupled with an increase in gross margin. The increased gross margin was primarily a result of component cost declines and improvements in supply chain costs per unit, the impact of which was partially offset by ASP declines. The operating expense decline as a percentage of net revenue in fiscal 2007 was the result primarily of the increased net revenue and continued efforts to improve our cost structure through efficiency measures.

Personal Systems 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:

        PSG
net revenue increased 16.2% (10.8% when adjusted for currency) in fiscal 2008 from fiscal 2007. Unit volumes increased by 22% in fiscal 2008 as compared to fiscal 2007. The unit
volume increase was the result of strong growth in notebooks, with continued strength in emerging markets. In fiscal 2008, net revenue for notebook PCs increased 28% while net revenue for desktop PCs
increased 5% from the prior-year period. In fiscal 2008, net revenue for consumer clients increased 19%, while net revenue for commercial clients increased 15% from the
prior-year period. The net revenue increase in Other PSG in fiscal 2008 was related primarily to increased sales of third-party branded options and extended warranties. The revenue
increase was partially offset by a decline in handhelds revenue driven by product transition within converged devices. In fiscal 2008, the positive revenue impact from the PSG unit volume increase
compared to fiscal 2007 was also moderated by a 7% decline in commercial client ASPs and a 4% decline in consumer client ASPs. ASPs declined from the prior year as a result of price erosion related to
component cost reductions and a competitive pricing environment, the effect of which was partially offset by an increased notebook mix and improved attach rates for monitors and other options.

        PSG
earnings from operations as a percentage of net revenue increased by 0.3 percentage points in fiscal 2008 from fiscal 2007 as a result of a decrease in operating expenses as a
percentage of net revenue combined with a flat gross margin. Gross margin performance was a result of declining ASPs offset by an increase in the attach rate of higher-margin options. The operating
expense decline as a percentage of net revenue in fiscal 2008 was the result primarily of the increased net revenue and continued efforts to improve our cost structure through efficiency measures.

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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)

        PSG
net revenue increased 24.8% (20.6% when adjusted for currency) in fiscal 2007 from fiscal 2006. Unit volumes increased by 28% in fiscal 2007, driving double-digit net revenue growth
across all regions. The unit volume increase was the result of strong growth in notebooks, with significant improvements in emerging markets. In fiscal 2007, net revenue for notebook PCs increased 47%
while net revenue for desktop PCs increased 9% from the prior-year period. In fiscal 2007, net revenue for consumer clients increased 39%, while net revenue for commercial clients
increased 16% from the prior-year period. The net revenue increase in Other PSG in fiscal 2007 was related primarily to improvements in extended warranty sales. The revenue increase was
partially offset by decreases in handhelds revenue due to declines in the PDA product market, which were partially offset by our new converged device and travel companion products. In fiscal 2007, the
positive revenue impact from the PSG unit volume increase compared to fiscal 2006 was also moderated by a 5% decline in commercial client ASPs and a 1% decline in consumer client ASPs. The decline in
ASPs from the prior year was a result of price erosion related to component cost reductions, the impact of which was partially offset by increased notebook mix and monitor attach rates.

        PSG
earnings from operations as a percentage of net revenue increased by 1.4 percentage points in fiscal 2007 from fiscal 2006 as a result of decreases in operating expenses as a
percentage of net revenue coupled with an increase in gross margin. The increased gross margin was primarily a result of component cost declines and improvements in supply chain costs per unit, the
impact of which was partially offset by ASP declines. The operating expense decline as a percentage of net revenue in fiscal 2007 was the result primarily of the increased net revenue and continued
efforts to improve our cost structure through efficiency measures.

Personal Systems Group

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

        PSG net revenue increased 16.3% (10.0% when adjusted for currency) and increased 20.0% (13.7% when adjusted for currency) for the second quarter and first six months of fiscal 2008,

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respectively, as compared to the same periods in fiscal 2007. Unit volumes increased by 21% and 24% for the second quarter and first six months of fiscal 2008, respectively, as compared to the same periods in fiscal 2007. The unit volume increases were the result of strong growth in notebooks, with continued strength in emerging markets. For the second quarter and first six months of fiscal 2008, net revenue for notebook PCs increased 31% and 34%, respectively. Desktop PC net revenue increased slightly for the second quarter while increasing 8% for the first six months of fiscal 2008. For the second quarter and first six months of fiscal 2008, net revenue for consumer clients increased 16% and 23%, respectively, while net revenue for commercial clients increased 17% and 20%, respectively, from the prior year periods. The net revenue increase in Other PSG for both periods was related primarily to increased sales of third party branded options and extended warranties. The revenue increases were partially offset by a decrease in handhelds due to a decline in the Personal Digital Assistant product market, coupled with our product transition within converged devices. For the second quarter and first six months of fiscal 2008, the PSG unit volume increase was moderated by ASP declines of 2% in consumer client and 6% in commercial client. ASPs declined from the prior year periods as a result of price erosion related to component cost reductions, the effect of which was partially offset by an increased notebook mix and improved attach rates for monitors and other accessories.

        PSG earnings from operations as a percentage of net revenue for the second quarter and first six months of fiscal 2008 increased by 0.6 and 0.8 percentage points, respectively, compared to the same periods in fiscal 2007 due primarily to increases in gross margin as a percentage of net revenue for both periods. For the second quarter of fiscal 2008, a slight decline in operating expenses as a percentage of net revenue contributed to the earnings from operations improvement. For the first six months of fiscal 2008, an increase in operating expenses as a percentage of net revenue slightly offset the improved gross margin. The gross margin increase for both periods was due primarily to favorable component pricing, improvements in supply chain costs and increases in attach rates.

Personal Systems Group

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

        PSG's net revenue increased 23.8% for the three months ended January 31, 2008 compared to the same period in fiscal 2007 (17% on a constant currency basis). The favorable currency impact was due primarily to the movement of the dollar against the euro. An overall unit volume increase of 27% drove double-digit net revenue growth across all regions. The unit volume increase was the result of strong growth in notebooks, with continued strong growth in emerging markets. Net revenue for notebook PCs increased 37%, while net revenue for desktop PCs increased 15% from the prior-year period. Net revenue for consumer clients and commercial clients increased 29% and 22%, respectively, from the prior-year period. The net revenue increase in Other PSG was related primarily to improvements in extended warranty and third-party branded options sales. The revenue increases were partially offset by a decrease in handhelds due to a decline in the Personal Digital Assistant product market, coupled with our product transition within converged devices. The PSG unit volume increase was moderated by declines of 2% in consumer client ASPs and 6% in commercial client ASPs. ASPs declined from the prior-year period as a result of price erosion related to component cost reductions. The declines in ASPs were partially offset by an increased notebook revenue mix and improved attach rates for monitors and other accessories.

        For the three months ended January 31, 2008, PSG's earnings from operations as a percentage of net revenue increased by 1.1 percentage points from the same period in fiscal 2007 as a result of an increase in gross margin, which was partially offset by a slight increase in operating expenses as a percentage of net revenue. The gross margin increase was due primarily to favorable component pricing, improvement in supply chain costs and increases in the attach rates for monitors and other accessories. The slight increase in operating expenses as a percentage of net revenue was the result primarily of our investments in marketing opportunities and sales force.

Personal Systems 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:

        On a constant currency basis, PSG's net revenue increased 21% in fiscal 2007 from fiscal 2006. The favorable currency impact was due primarily to the movement of the dollar against the euro. Unit volumes increased by 28% in fiscal 2007, driving double-digit net revenue growth across all regions. The unit volume increase was the result of strong growth in notebooks, with significant improvements in emerging markets. In fiscal 2007, net revenue for notebook PCs increased 47% while net revenue for desktop PCs increased 8% from the prior-year period. In fiscal 2007, net revenue for consumer clients increased 39%, while net revenue for commercial clients increased 16% from the prior-year period. The net revenue increase in Other PSG in fiscal 2007 was related primarily to improvements in extended warranty sales. The revenue increase was partially offset by decreases in handhelds revenue due to declines in the Personal Digital Assistant ("PDA") product market, which were partially offset by our new converged device and travel companion products. In fiscal 2007, the positive revenue impact from the PSG unit volume increase compared to fiscal 2006 was also moderated by a 5% decline in commercial client ASPs and a 1% decline in consumer client ASPs. ASPs declined from the prior year was a result of price erosion related to component cost reductions, the impact of which was partially offset by increased notebook mix and monitor attach rates.

        PSG earnings from operations as a percentage of net revenue increased by 1.4 percentage points in fiscal 2007 from fiscal 2006 as a result of decreases in operating expenses as a percentage of net revenue coupled with an increase in gross margin. The increased gross margin was primarily a result of component cost declines and improvements in supply chain costs per unit, the impact of which was partially offset by ASP declines. The operating expense decline as a percentage of net revenue in fiscal 2007 was the result primarily of the increased net revenue and continued efforts to improve our cost structure through efficiency measures.

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        On a constant currency basis, PSG's net revenue increased 10% in fiscal 2006. The unfavorable currency impact was due primarily to the movement of the dollar against the euro and the yen. In fiscal 2006, net revenue increased across all regions and each business unit with the exception of handhelds, due primarily to an overall volume increase of 15%. The volume increase in fiscal 2006 was the result of strong growth in the consumer and commercial markets, with significant improvement in emerging markets. Net revenue for notebook PCs increased 23% while net revenue for desktop PCs increased slightly in fiscal 2006 from the prior year. Net revenue for consumer clients and commercial clients increased 19% and 4%, respectively, from the prior year. The revenue increases in consumer and commercial clients were partially offset by a decrease in handhelds revenue due to a decline in the PDA product market coupled with our product transition to converged devices. The PSG volume increase in fiscal 2006 was moderated by a decline of 6% in consumer client ASPs and 7% in commercial client ASPs. The ASP declines were due to pricing decisions resulting from lower component costs as well as competitive pricing pressures, the impact of which was partially offset by a strong monitor attach rate in commercial desktops PCs.

        PSG earnings from operations as a percentage of net revenue increased by 1.4 percentage points in fiscal 2006 from fiscal 2005 as a result of gross margin improvement and a decrease in operating expenses as a percentage of revenue. The gross margin improvement was due primarily to reduced supply chain costs and warranty expense as a percentage of net revenue, combined with component cost declines. The operating expense decline as a percentage of net revenue was the result primarily of the increased net revenue and continued efforts on improving cost structure through efficiency measures. Operating expenses decreased slightly in fiscal 2006 due primarily to savings from our expense controls, which savings were partially offset by higher bonus accruals in fiscal 2006.