Hewlett-Packard (HPQ)

Provision for Taxes

        HP's effective tax rate was 19.8% and 18.0% for the three months ended January 31, 2010 and January 31, 2009, respectively. HP's effective tax rate increased due to a decline in the percentage of total earnings earned in lower-tax jurisdictions and a decline in its discrete tax benefits relative to pretax earnings. HP's effective tax rate generally differs from the U.S. federal statutory rate of 35% due to favorable tax rates associated with certain earnings from HP's operations in lower-tax jurisdictions throughout the world. HP has not provided U.S. taxes for all of such earnings because HP plans to reinvest some of those earnings indefinitely outside the United States.

        In the three months ended January 31, 2010, HP recorded discrete items with a net tax benefit of $92 million, decreasing the effective tax rate. These amounts included net tax benefits of $54 million from restructuring and acquisition charges, a tax benefit of $19 million from settlement of a tax audit matter, a net tax benefit of $19 million from adjustments to prior year foreign income tax accruals and credits, and other miscellaneous discrete items.

        In the three months ended January 31, 2009, HP recorded discrete items with a net tax benefit of $91 million, decreasing the effective tax rate. These amounts included net tax benefits of $63 million from restructuring and acquisition charges and other miscellaneous discrete items resulting in a net tax benefit of $28 million.

        During the first three months of fiscal 2010, the amount of gross unrecognized tax benefits remained at $1.9 billion, of which up to $940 million would affect HP's effective tax rate if realized. HP recognizes interest expense and penalties on unrecognized tax benefits within income tax expense. During the first three months of fiscal 2010, there was no material change in the amount of accrued net interest and penalties.

30

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 13: Income Taxes (Continued)

        HP engages in continuous discussion and negotiation with tax authorities regarding tax matters in the various jurisdictions. HP does not expect complete resolution of any Internal Revenue Service ("IRS") audit cycle within the next 12 months. However, it is reasonably possible that certain federal, foreign and state tax issues may be concluded in the next 12 months, including issues involving transfer pricing and other matters. Accordingly, HP believes it is reasonably possible that its existing unrecognized tax benefits may be reduced by an amount up to $115 million within the next 12 months.

        HP is subject to income tax in the United States and over sixty foreign countries and is subject to routine corporate income tax audits in many of these jurisdictions. In addition, HP is subject to numerous ongoing audits by state and foreign tax authorities. HP has received from the IRS Notices of Deficiency for its fiscal 1999, 2000, 2003, 2004 and 2005 tax years, and Revenue Agent's Reports ("RAR's") for its fiscal 2001 and 2002 tax years. The IRS began an audit of HP's 2006 and 2007 income tax returns in 2009. With respect to major foreign and state tax jurisdictions, HP is no longer subject to tax authority examinations for years prior to 1999. HP believes that adequate reserves have been provided for all open tax years.

        The breakdown between current and long-term deferred tax assets and deferred tax liabilities was as follows:

Provision for Taxes

        Our effective tax rate was 19.8% and 18.0% for the three months ended January 31, 2010 and January 31, 2009, respectively. Our effective tax rate increased due to a decline in the percentage of total earnings earned in lower-tax jurisdictions and a decline in our discrete tax benefits relative to pretax earnings. Our effective tax rate generally differs from the U.S. federal statutory rate of 35% due to favorable tax rates associated with certain earnings from our operations in lower-tax jurisdictions throughout the world. We have not provided U.S. taxes for all of such earnings because we plan to reinvest some of those earnings indefinitely outside the United States.

        In the three months ended January 31, 2010, we recorded discrete items with a net tax benefit of $92 million, decreasing the effective tax rate. These amounts included net tax benefits of $54 million from restructuring and acquisition charges, a tax benefit of $19 million from settlement of a tax audit matter, a net tax benefit of $19 million from adjustments to prior year foreign income tax accruals and credits, and other miscellaneous discrete items.

        In the three months ended January 31, 2009, we recorded discrete items with a net tax benefit of $91 million, decreasing the effective tax rate. These amounts included net tax benefits of $63 million from restructuring and acquisition charges and other miscellaneous discrete items resulting in a net tax benefit of $28 million.

Provision for Taxes

        Our effective tax rates were 18.6%, 20.5% and 20.8% in fiscal 2009, fiscal 2008 and fiscal 2007, respectively. HP's effective tax rate generally differs from the U.S. federal statutory rate of 35% due to favorable tax rates associated with some earnings from HP's operations in lower-tax jurisdictions throughout the world. HP has not provided U.S. taxes for all of such earnings because HP plans to reinvest some of those earnings indefinitely outside the United States.

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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)

        The decrease in the overall tax rate in fiscal 2009 from fiscal 2008 was due primarily to the net income tax benefits recorded for fiscal 2009 which were related to foreign net operating losses, adjustments to estimated fiscal 2008 tax accruals upon filing the 2008 income tax returns, valuation allowance reversals for state and foreign net operating losses, and other miscellaneous items.

        The decrease in the overall tax rate in fiscal 2008 from fiscal 2007 was related in part to lower tax rates in other jurisdictions.

        For a full reconciliation of our effective tax rate to the U.S. federal statutory rate of 35% and further explanation of our provision for taxes, see Note 14 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference.

Provision for Taxes

        HP's effective tax rate was 18.6% and 20.7% for the three months ended April 30, 2009 and April 30, 2008, respectively, and 18.3% and 20.6% for the six months ended April 30, 2009 and April 30, 2008, respectively. HP's effective tax rate generally differs from the U.S. federal statutory rate of 35% due to favorable tax rates associated with certain earnings from HP's operations in lower-tax

35

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 13: Income Taxes (Continued)

jurisdictions throughout the world. HP has not provided U.S. taxes for such earnings because HP plans to reinvest those earnings indefinitely outside the United States.

        There were no material discrete items affecting the tax rate for the three and six months ended April 30, 2009.

        In the three and six months ended April 30, 2008, HP recorded discrete events with a net tax benefit of $58 million and $47 million, respectively, decreasing the effective tax rate. These amounts include reductions to net income tax accruals of $224 million as a result of settlements with tax authorities regarding certain transfer pricing issues for fiscal years 1993 through 2005. These favorable adjustments were offset in part by an increase of $167 million to deferred tax liabilities related to earnings outside the United States. HP recorded other miscellaneous discrete events that resulted in a net tax benefit of $1 million and a net tax expense of $10 million for the three and six months ended April 30, 2008, respectively.

        During the second quarter of fiscal 2009, the amounts of gross unrecognized tax benefits determined in accordance with Financial Interpretation No. 48, "Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109" ("FIN 48") decreased by $200 million to $2.3 billion as of April 30, 2009, of which up to $805 million would affect HP's effective tax rate if realized.

        HP recognizes interest expense and penalties on unrecognized tax benefits and interest income from favorable settlements and income tax receivables within income tax expense. As of April 30, 2009 HP had accrued a net $154 million income tax payable for interest and penalties. There were no material amounts of net interest income on tax overpayments recorded during the three and six months ended April 30, 2009.

        HP engages in continuous discussion and negotiation with tax authorities regarding tax matters in the various jurisdictions. HP does not expect complete resolution of any Internal Revenue Service ("IRS") audit cycle within the next 12 months. However, it is reasonably possible that certain federal, foreign and state tax issues may be concluded in the next 12 months, including issues involving transfer pricing and other matters. Accordingly, HP believes it is reasonably possible that its existing unrecognized tax benefits may be reduced by an amount up to $350 million within the next twelve months.

        HP is subject to income tax in the United States and over sixty foreign countries and is subject to routine corporate income tax audits in many of these jurisdictions. In addition, HP is subject to numerous ongoing audits by state and foreign tax authorities. HP has received from the IRS Notices of Deficiency for its fiscal 1999, 2000 and 2003 tax years and Revenue Agent's Reports ("RAR's") for its fiscal 2001 and 2002 tax years. The IRS began an audit of HP's 2004 and 2005 income tax returns in 2007. With respect to major foreign and state tax jurisdictions, HP is no longer subject to tax authority examinations for years prior to 1999. HP believes that adequate reserves have been provided for all open tax years.

36

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 13: Income Taxes (Continued)

        The breakdown between current and long-term deferred tax assets and deferred tax liabilities was as follows:

Provision for Taxes

        Our effective tax rate was 18.6% and 20.7% for the three months ended April 30, 2009 and April 30, 2008, respectively, and 18.3% and 20.6% for the six months ended April 30, 2009 and April 30, 2008, respectively. Our effective tax rate generally differs from the U.S. federal statutory rate

67

of 35% due to favorable tax rates associated with certain earnings from our operations in lower-tax jurisdictions throughout the world. We have not provided U.S. taxes for such earnings because we plan to reinvest those earnings indefinitely outside the United States.

        There were no material discrete items affecting the tax rate for the three and six months ended April 30, 2009.

        In the three and six months ended April 30, 2008, we recorded discrete events with a net tax benefit of $58 million and $47 million, respectively, decreasing the effective tax rate. These amounts include reductions to net income tax accruals of $224 million as a result of settlements with tax authorities regarding certain transfer pricing issues for fiscal years 1993 through 2005. These favorable adjustments were offset in part by an increase of $167 million to deferred tax liabilities related to earnings outside the United States. We recorded other miscellaneous discrete events that resulted in a net tax benefit of $1 million and a net tax expense of $10 million for the three and six months ended April 30, 2008, respectively.

Provision for Taxes

        HP's effective tax rate was 18.0% and 20.6% for the three months ended January 31, 2009 and January 31, 2008, respectively. HP's effective tax rate generally differs from the U.S. federal statutory rate of 35% due to the tax rate benefits of certain earnings from HP's operations in lower-tax jurisdictions throughout the world. HP has not provided U.S. taxes for such earnings because HP plans to reinvest those earnings indefinitely outside the United States. There were no material discrete items affecting the tax rate for the three months ended January 31, 2009 and January 31, 2008, respectively.

        During the first three months of fiscal 2009, the amount of gross unrecognized tax benefits determined in accordance with Financial Interpretation No. 48, "Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109" ("FIN 48") increased by $171 million to $2.5 billion, of which up to $758 million would affect HP's effective tax rate if realized. HP recognizes interest expense and penalties on unrecognized tax benefits within income tax expense. During the first three months of fiscal 2009, there was no material change in the amount of accrued net interest and penalties.

        HP is subject to income tax in the United States and over sixty foreign countries and is subject to routine corporate income tax audits in many of these jurisdictions. In addition, HP is subject to numerous ongoing audits by state and foreign tax authorities. HP has received from the Internal Revenue Service ("IRS") Notices of Deficiency for its fiscal 1999, 2000 and 2003 tax years and Revenue Agent's Reports ("RAR's") for its fiscal 2001 and 2002 tax years. The IRS began an audit of HP's 2004 and 2005 income tax returns in 2007. With respect to major foreign and state tax jurisdictions, HP is no longer subject to tax authority examinations for years prior to 1999. HP believes that adequate reserves have been provided for all open tax years.

27

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 12: Income Taxes (Continued)

        HP engages in continuous discussion and negotiation with taxing authorities regarding tax matters in the various jurisdictions. HP does not expect complete resolution of any IRS audit cycle within the next 12 months. However, it is reasonably possible that certain foreign and state tax issues may be concluded in the next 12 months, including issues involving transfer pricing and other matters. Accordingly, HP believes it is reasonably possible that its existing unrecognized tax benefits may be reduced by an amount up to $320 million within the next twelve months.

        The breakdown between current and long-term deferred tax assets and deferred tax liabilities was as follows:

Provision for Taxes

        Our effective tax rate was 18.0% and 20.6% for the three months ended January 31, 2009 and January 31, 2008, respectively. Our effective tax rate generally differs from the U.S. federal statutory rate of 35% due to the tax rate benefits of certain earnings from our operations in lower-tax jurisdictions throughout the world. We have not provided U.S. taxes for such earnings because we plan to reinvest those earnings indefinitely outside the United States. There were no material discrete items affecting the tax rate for the three months ended January 31, 2009 and January 31, 2008, respectively.

54

Segment Information

        A description of the products and services for each segment can be found in Note 16 to the Consolidated Condensed Financial Statements. Future changes to this organizational structure may result in changes to the business segments disclosed.

Provision for Taxes

        Our effective tax rates were 20.5%, 20.8% and 13.8% in fiscal 2008, 2007 and 2006, respectively.

        The decrease in the overall tax rate in fiscal 2008 from fiscal 2007 was related in part to lower tax rates in other jurisdictions.

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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)

        The increase in the overall tax rate in fiscal 2007 from fiscal 2006 was related in part to favorable income tax adjustments of $599 million recorded in fiscal 2006, which included net favorable tax adjustments of $565 million to income tax accruals as a result of the settlement of the Internal Revenue Service ("IRS") examinations of our U.S. income tax returns for fiscal years 1993 to 1998. The reductions to the net income tax accruals for these years related primarily to the resolution of issues with respect to Puerto Rico manufacturing tax incentives and export tax incentives, and other issues involving our non-U.S. operations.

        For a full reconciliation of our effective tax rate to the U.S. federal statutory rate of 35% and further explanation of our provision for taxes, see Note 13 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference.

Provision for Taxes

        Our effective tax rates were 20.5%, 20.8% and 13.8% in fiscal 2008, 2007 and 2006, respectively.

        The
decrease in the overall tax rate in fiscal 2008 from fiscal 2007 was related in part to lower tax rates in other jurisdictions.

54

NAME="page_ds72001_1_55">





































Table of Contents

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

        The increase in the overall tax rate in fiscal 2007 from fiscal 2006 was related in part to favorable income tax adjustments of $599 million
recorded in fiscal 2006, which included net favorable tax adjustments of $565 million to income tax accruals as a result of the settlement of the Internal Revenue Service ("IRS")
examinations of our U.S. income tax returns for fiscal years 1993 to 1998. The reductions to the net income tax accruals for these years related primarily to the resolution of issues
with respect to Puerto Rico manufacturing tax incentives and export tax incentives, and other issues involving our non-U.S. operations.

        For
a full reconciliation of our effective tax rate to the U.S. federal statutory rate of 35% and further explanation of our provision for taxes, see Note 13 to the
Consolidated Financial Statements in Item 8, which is incorporated herein by reference.

Provision for Taxes

        Our effective tax rate was 20.6% and 22.2% for the three months ended July 31, 2008 and July 31, 2007, respectively, and 20.6% and 21.3% for the nine months ended July 31, 2008 and July 31, 2007, respectively. Our effective tax rate generally differs from the U.S. federal statutory rate of 35% due to the tax rate benefits of certain earnings from our operations in lower-tax jurisdictions throughout the world. We have not provided U.S. taxes for such earnings because we plan to reinvest those earnings indefinitely outside the United States.

        In the three and nine months ended July 31, 2008, we recorded discrete items with a net tax benefit of $5 million and $52 million, respectively, decreasing the effective tax rate. These amounts include reductions to net income tax accruals of $72 million and $296 million for the three and nine months ended July 31, 2008, respectively, as a result of settlements with tax authorities regarding certain transfer pricing issues for fiscal years 1993 through 2005. These favorable adjustments in the three and nine months ended July 31, 2008 were offset in part by a tax charge of $44 million for the adjustment to estimated fiscal 2007 tax accruals upon filing the 2007 U.S. federal income tax return, and by net increases of $30 million and $235 million, respectively, to deferred tax liabilities related to earnings outside the United States. We recorded other miscellaneous discrete items that resulted in a net tax benefit of $7 million and $35 million for the three and nine months ended July 31, 2008, respectively.

        In the three months ended July 31, 2007, we recorded other income tax adjustments of $64 million. This amount included a tax charge of $33 million for the adjustment to estimated fiscal 2006 tax accruals upon filing the 2006 U.S. federal income tax returns and a net increase to various tax reserves of $31 million. In the nine months ended July 31, 2007, we recorded other income tax adjustments of $54 million. This amount included a tax charge of $33 million as discussed above, a net increase to various tax reserves of $17 million and other items, resulting in a net charge of $4 million.

Provision for Taxes

        Our effective tax rate was 20.7% and 20.3% for the three months ended April 30, 2008 and April 30, 2007, respectively, and 20.6% and 20.8% for the six months ended April 30, 2008 and April 30, 2007, respectively. Our effective tax rate generally differs from the U.S. federal statutory rate of 35% due to the tax rate benefits of certain earnings from our operations in lower-tax jurisdictions throughout the world for which we have not provided U.S. taxes because we plan to reinvest such earnings indefinitely outside the United States.

        In the three and six months ended April 30, 2008, we recorded discrete events with a net tax benefit of $58 million and $47 million, respectively, decreasing the effective tax rate. These amounts include reductions to net income tax accruals of $224 million as a result of settlements with tax

52

authorities regarding certain transfer pricing issues for fiscal years 1993 through 2005. These favorable adjustments were offset in part by an increase of $167 million to deferred tax liabilities related to earnings outside the United States. We recorded other miscellaneous discrete events that resulted in a net tax benefit of $1 million and a net tax expense of $10 million for the three and six months ended April 30, 2008, respectively. There were no material discrete items affecting the tax rate for the three and six months ended April 30, 2007.

Provision for Taxes

        Our effective tax rate was 20.6% and 21.2% for the three months ended January 31, 2008 and January 31, 2007, respectively. Our effective tax rate generally differs from the U.S. federal statutory rate of 35% due to the tax rate benefits of certain earnings from our operations in lower-tax jurisdictions throughout the world for which we have not provided U.S. taxes because we plan to reinvest such earnings indefinitely outside the U.S. There were no material discrete items affecting the tax rate for the three months ended January 31, 2008 and January 31, 2007, respectively.

Provision for Taxes

        Our effective tax rates were 20.8%, 13.8%, and 32.3% in fiscal 2007, 2006 and 2005, respectively.

        The increase in the overall tax rate in fiscal 2007 from fiscal 2006 was related in part to favorable income tax adjustments of $599 million recorded in fiscal 2006, which included net favorable tax adjustments of $565 million to income tax accruals as a result of the settlement of IRS examinations of our U.S. income tax returns for fiscal years 1993 to 1998. The reductions to the net income tax accruals for these years related primarily to the resolution of issues with respect to Puerto Rico manufacturing tax incentives and export tax incentives, and other issues involving our non-U.S. operations.

        In addition, the decrease in the overall tax rate in 2006 from fiscal 2005 was attributable in part to $697 million of income tax expense related to items unique to fiscal 2005. The tax expense was the result primarily of $792 million associated with the repatriation of $14.5 billion under the American Jobs Creation Act of 2004 ("Jobs Act") and $76 million related to additional distributions received from foreign subsidiaries. These tax expenses were offset in part by tax benefits of $177 million resulting from agreements with the IRS and other governmental authorities. The Jobs Act, enacted on October 22, 2004, provided for a temporary 85% dividend received deduction on certain foreign earnings repatriated during a one-year period. The deduction resulted in an approximate 5.25% federal tax rate on the repatriated earnings.

        For a full reconciliation of our effective tax rate to the U.S. federal statutory rate of 35% and further explanation of our provision for taxes, see Note 13 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference.

Provision for Taxes

        Our effective tax rate was 22.2% and 20.9% for the three months ended July 31, 2007 and July 31, 2006, respectively, and 21.3% and 11.5% for the nine months ended July 31, 2007 and July 31, 2006, respectively. Generally our effective tax rate differs from the U.S. federal statutory rate of 35% due to the tax rate benefits of certain earnings from our operations in lower-tax jurisdictions throughout the world for which we have not provided U.S. taxes because we plan to reinvest such earnings indefinitely outside the United States.

        In the three months ended July 31, 2007, we recorded other income tax adjustments of $64 million. This amount included a tax charge of $33 million for the adjustment to estimated fiscal 2006 tax accruals upon filing the 2006 U.S. federal income tax returns and a net increase to various tax reserves of $31 million. In the nine months ended July 31, 2007, we recorded other income tax adjustments of $54 million. This amount included a tax charge of $33 million as discussed above, a net increase to various tax reserves of $17 million and other items, resulting in a net charge of $4 million.

54

        In the three months ended July 31, 2006, we recorded other income tax adjustments of $55 million. This amount included a tax charge of $34 million for the adjustment to estimated fiscal 2005 tax accruals upon filing the 2005 U.S. federal income tax return and a net increase to various tax reserves of $21 million.

        In the nine months ended July 31, 2006, other income tax adjustments of $408 million further decreased the effective tax rate. This amount included net favorable tax adjustments of $49 million and $443 million to income tax accruals as a result of the final settlement of the Internal Revenue Service ("IRS") examinations of our U.S. income tax returns for fiscal years 1993 to 1995 and 1996 to 1998, respectively. The reductions to the net income tax accruals for fiscal years 1996 to 1998 related primarily to the resolution of issues with respect to Puerto Rico manufacturing tax incentives and export tax incentives, other issues involving our non-U.S. operations, and interest accruals. These favorable income tax adjustments were offset in part by adjustments to estimated tax accruals, related primarily to the filing of the 2005 tax return as noted earlier, and increases to other tax reserves related to various jurisdictions.

        On June 28, 2007 we received a Notice of Deficiency from the IRS for our fiscal 1999 and 2000 tax years. The Notice of Deficiency asserted that we owe additional tax of $13 million for these two years. At the same time, we received a Revenue Agent's Report ("RAR") from IRS for our fiscal 2001 tax year that proposed no change in our tax liability for that year. In addition to the proposed deficiencies for fiscal 1999 and 2000, the IRS's adjustments, if sustained, would reduce tax refund claims we have filed for foreign tax credit and net operating loss carrybacks to earlier fiscal years and reduce the tax benefits of carryforwards to subsequent years, by approximately $361 million. We plan to contest certain of the adjustments proposed in the Notice of Deficiency and the RAR. We believe that we have provided adequate reserves for any tax deficiencies or reductions in refund claims that could result from the IRS actions.

Provision for Taxes

        Our effective tax rate was 20.3% and (4.3)% for the three months ended April 30, 2007 and April 30, 2006, respectively, and 20.8% and 6.6% for the six months ended April 30, 2007 and April 30, 2006, respectively. Our effective tax rate generally differs from the U.S. federal statutory rate of 35% due to the tax rate benefits of certain earnings from our operations in lower-tax jurisdictions throughout the world for which we have not provided U.S. taxes because we plan to reinvest such earnings indefinitely outside the U.S. There were no material discrete items affecting the tax rate for the three and six months ended April 30, 2007.

        Other income tax adjustments of $437 million decreased the effective tax rate for the three and six months ended April 30, 2006. This amount includes reductions to net income tax accruals of $49 million and $443 million as a result of the final settlement of the Internal Revenue Service ("IRS") examinations of our U.S. income tax returns for fiscal years 1993 to 1995 and 1996 to 1998, respectively. The reductions to the net income tax accruals for fiscal years 1996 to 1998 relate primarily to the resolution of issues with respect to Puerto Rico manufacturing tax incentives and export tax incentives, as well as other issues involving our non-U.S. operations and interest accruals. These favorable income tax adjustments were offset in part by an increase of approximately $35 million to deferred tax liabilities related to earnings outside the U.S. as well as $20 million in additional net income tax accruals primarily related to non-U.S. income tax examinations.

Provision for Taxes

Our effective tax rates were 21.2% and 19.7% for the three months ended January 31, 2007 and January 31, 2006, respectively. Our effective tax rate generally differs from the U.S. federal statutory rate of 35% due to the tax rate benefits of certain earnings from our operations in lower-tax jurisdictions throughout the world for which we have not provided U.S. taxes because we plan to reinvest such earnings indefinitely outside the U.S. There were no material discrete items affecting the tax rates for the three months ended January 31, 2007 and January 31, 2006, respectively.

Provision for Taxes

        Our effective tax rate was 13.8%, 32.3% and 16.7% in fiscal 2006, 2005 and 2004, respectively.

        The decrease in the overall tax rate in fiscal 2006 from fiscal 2005 was related in part to other income tax adjustments of $599 million in fiscal 2006. This included net favorable tax adjustments of $565 million to income tax accruals as a result of the settlement of IRS examinations of our U.S. income tax returns for fiscal years 1993 to 1998. The reductions to the net income tax accruals for these years related primarily to the resolution of issues with respect to Puerto Rico manufacturing tax incentives and export tax incentives, and other issues involving our non-U.S. operations. In addition, the decrease in the overall tax rate in 2006 from fiscal 2005 was attributable in part to $697 million of income tax expense related to items unique to fiscal 2005. The tax expense was the result primarily of $792 million associated with the repatriation of $14.5 billion under the American Jobs Creation Act of 2004 ("Jobs Act") and $76 million related to additional distributions received from foreign subsidiaries. These tax expenses were offset in part by tax benefits of $177 million resulting from agreements with the IRS and other governmental authorities.

        The increase in the overall tax rate in fiscal 2005 from fiscal 2004 was related primarily to tax expense associated with the repatriation of $14.5 billion under the provisions of the Jobs Act which was partially offset by the increase in the tax benefit derived from lower rates in other jurisdictions. The Jobs Act, enacted on October 22, 2004, provided for a temporary 85% dividend received deduction on certain foreign earnings repatriated during a one-year period. The deduction resulted in an approximate 5.25% federal tax rate on the repatriated earnings.

        In fiscal 2004, our tax rate benefited from net favorable adjustments to previously estimated tax liabilities of $207 million, which decreased the provision for taxes. The most significant favorable adjustments related to the resolution of a California state income tax audit, a net favorable revision to estimated tax accruals upon filing the 2003 U.S. income tax return and a reduction in taxes on foreign earnings due to a change in regulatory policy. These favorable adjustments were offset in part by the net effect of smaller adjustments to income tax liabilities in various jurisdictions.

        For a full reconciliation of our effective tax rate to the U.S. federal statutory rate of 35% and further explanation of our provision for taxes, see Note 13 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference.

49

Provision for Taxes

        HP's effective tax rate was 20.9% and 92.9% for the three months ended July 31, 2006 and July 31, 2005, respectively, and 11.5% and 37.3% for the nine months ended July 31, 2006 and July 31, 2005, respectively. HP's effective tax rate generally differs from the U.S. federal statutory rate of 35% due to the tax rate benefits of certain earnings from HP's operations in lower-tax jurisdictions throughout the world for which HP has not provided U.S. taxes because HP plans to reinvest such earnings indefinitely outside the U.S.

        In the three months ended July 31, 2006, HP recorded other income tax adjustments of $55 million. This amount included a tax charge of $34 million for the adjustment to estimated fiscal 2005 tax accruals upon filing the 2005 U.S. federal income tax return, and a net increase to various tax reserves of $21 million.

        In the nine months ended July 31, 2006, other income tax adjustments of $408 million further decreased the effective tax rate. This included net favorable tax adjustments of $49 million and $443 million to income tax accruals as a result of the final settlement of the Internal Revenue Service ("IRS") examinations of HP's U.S. income tax returns for fiscal years 1993 to 1995 and 1996 to 1998, respectively. The reductions to the net income tax accruals for fiscal years 1996 to 1998 related primarily to the resolution of issues with respect to Puerto Rico manufacturing tax incentives and export tax incentives, other issues involving HP's non-U.S. operations and interest accruals. These favorable income tax adjustments were offset in part by adjustments to estimated tax accruals, related primarily to the filing of the 2005 tax return as noted earlier, and increases to other tax reserves related to various jurisdictions.

        In the three months ended July 31, 2005, HP recorded $900 million of net income tax expense related to items unique to the quarter. This included $788 million of tax expense associated with HP's determination in the quarter to repatriate $14.5 billion under the provisions of the American Jobs Creation Act of 2004 ("the Jobs Act"); $47 million related to additional distributions received from foreign subsidiaries; and $65 million related primarily to adjustments to previously estimated tax liabilities. In addition, the tax rate was affected by certain transactions and adjustments described herein.

        Included in income tax expense for the nine months ended July 31, 2005 was a net charge of $740 million, which included the $900 million expense described above; a $63 million benefit to deferred taxes related to intercompany product transfers, which HP recorded in the second fiscal quarter; $105 million in benefits resulting from an agreement with the IRS in the first fiscal quarter, which reduced accruals of U.S. taxes on earnings outside the U.S.; and other adjustments.

        Excluding the $788 million tax charge related to the repatriation under the provisions of the Jobs Act, HP's effective tax rates would have been 16.7% and 12.4% for the three months ended July 31, 2005 and the nine months ended July 31, 2005, respectively. Excluding the impact of the transactions and adjustments described above, and the tax effect of pre-tax adjustments unique to the periods, HP's effective tax rates would have been 8.2% and 15.8% for the three months and nine months ended July 31, 2005, respectively.

26

        Deferred tax assets were as follows:

Provision for Taxes

        Our effective tax rate was 19.7% and 10.2% for the three months ended January 31, 2006 and January 31, 2005, respectively. Our effective tax rate differs generally from the U.S. federal statutory rate of 35% due to the tax rate benefits of certain earnings from operations in lower-tax jurisdictions throughout the world for which we have not provided U.S. taxes because we plan to reinvest such earnings indefinitely outside the U.S.

        For the three months ended January 31, 2005, the following items further reduced our effective tax rate for the 2005 period, including $61 million in net adjustments to previously estimated tax liabilities. An agreement with the Internal Revenue Service resulted in a $105 million adjustment primarily to reduce accruals of U.S. taxes on earnings outside the U.S. This was partly offset by $44 million in net unfavorable adjustments to other previously estimated tax liabilities, predominantly in non-U.S. jurisdictions. Also benefiting the effective tax rate for the first quarter of fiscal 2005 was the dispute settlement with Intergraph. We recorded a pre-tax charge of $116 million related to this settlement. As the settlement is deductible from U.S. taxable income at the statutory rate of 35%, the effective tax rate for the first quarter of fiscal 2005 was reduced by an additional 2.4%. There were no such material one time items affecting the tax rate for the three months ended January 31, 2006.

Provision for Taxes

        Our effective tax rate was 32.3%, 16.7% and 12.1% in fiscal 2005, 2004 and 2003, respectively.

        The increase in the overall tax rate in fiscal 2005 from fiscal 2004 is related primarily to tax expense associated with the repatriation of $14.5 billion under the provisions of the American Jobs Creation Act of 2004 (the "Jobs Act"), which was partially offset by the increase in the tax benefit derived from lower rates in other jurisdictions. The increase in the overall tax rate in fiscal 2004 from fiscal 2003 was the result primarily of a decline in the tax benefit from lower rates in other jurisdictions in fiscal 2004.

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        The Jobs Act, enacted on October 22, 2004, provides for a temporary 85% dividends received deduction on certain foreign earnings repatriated during a one-year period. The deduction results in an approximate 5.25% federal tax rate on the repatriated earnings.

        In fiscal 2005, we recorded $697 million of income tax expense related to items unique to the year. The tax expense was the result primarily of $792 million associated with the repatriation of $14.5 billion under the Jobs Act and $76 million related to additional distributions received from foreign subsidiaries. These tax expenses were offset in part by tax benefits of $177 million resulting from agreements with the Internal Revenue Service and other governmental authorities.

        In fiscal 2004, our tax rate benefited from net favorable adjustments to previously estimated tax liabilities of $207 million, which decreased the provision for taxes by approximately $0.07 per share. The most significant favorable adjustments related to the resolution of a California state income tax audit, a net favorable revision to estimated tax accruals upon filing the 2003 U.S. income tax return and a reduction in taxes on foreign earnings due to a change in regulatory policy. These favorable adjustments were offset in part by the net effect of smaller adjustments to income tax liabilities in various jurisdictions. In fiscal 2003, the tax rate benefited primarily from lower tax rates in non-U.S. jurisdictions.

        For a full reconciliation of our effective tax rate to the U.S. federal statutory rate of 35% and further explanation of our provision for taxes, see Note 12 of the Consolidated Financial Statements in Item 8, which is incorporated herein by reference.

Provision for Taxes

        In the three months ended July 31, 2005, we recorded $900 million of net income tax expense related to items unique to the quarter. This included $788 million of tax expense associated with our determination in the quarter to repatriate $14.5 billion under the provisions of the Jobs Act; $47 million related to additional distributions received from foreign subsidiaries; and $65 million primarily related to adjustments to previously estimated tax liabilities. In addition, the tax rate is affected by certain transactions and adjustments described herein.

        Included in income tax expense for the nine months ended July 31, 2005 is a net charge of $740 million which includes the $900 million expense described above; a $63 million benefit to deferred taxes related to intercompany product transfers, which was recorded in the second fiscal quarter; $105 million in benefits resulting from an agreement with the Internal Revenue Service ("IRS") in the first fiscal quarter, which reduced accruals of U.S. taxes on earnings outside the U.S.; and other adjustments.

        For the three and nine months ended July 31, 2004, net favorable adjustments to previously estimated tax liabilities were $101 million and $147 million, respectively. The adjustments recorded in the third quarter of fiscal 2004 consisted primarily of a net favorable revision to estimated tax accruals upon filing the 2003 U.S. income tax return and the resolution of certain outstanding matters with the tax authorities. Additional net favorable adjustments during the second quarter of fiscal 2004 were attributable primarily to a reduction in taxes on foreign earnings due to a change in regulatory policy.

        Our effective tax rates were 92.9% and 13.6% for the three months ended July 31, 2005 and July 31, 2004, respectively, and 37.3% and 17.2% for the nine months ended July 31, 2005 and July 31, 2004, respectively. Our effective tax rate generally differs from the U.S. federal statutory rate of 35% due to the tax rate benefits of certain earnings from operations in lower-tax jurisdictions throughout

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the world for which no U.S. taxes have been provided because such earnings are planned to be reinvested indefinitely outside the U.S.

        Excluding the $788 million tax charge related to the repatriation under the provisions of the Jobs Act, our effective tax rates would have been 16.7% and 12.4% for the three months and nine months ended July 31, 2005, respectively. Excluding the impact of the transactions and adjustments described above, and the tax effect of pre-tax adjustments unique to the periods, our effective tax rates would have been 8.2% and 27.3% for the three months ended July 31, 2005 and July 31, 2004, respectively, and 15.8% and 22.3% for the nine months ended July 31, 2005 and July 31, 2004, respectively.

Provision for Taxes

        Our effective tax rates were 10.5% and 17.0% for the three months ended April 30, 2005 and 2004, respectively, and 10.3% and 18.3% for the six months ended April 30, 2005 and April 30, 2004, respectively. Our effective tax rate generally differs from the U.S. federal statutory rate of 35% due to the tax rate benefits of certain earnings from operations in lower-tax jurisdictions throughout the world for which no U.S. taxes have been provided because such earnings are planned to be reinvested indefinitely outside the U.S.

        Other income tax adjustments of $106 million and $160 million, further reduced the effective tax rate for the three and six months, respectively, ended April 30, 2005. Of the $106 million, $63 million represents the net adjustment to deferred taxes related to intercompany product transfers. The remaining $43 million represents net favorable adjustments, related primarily to the net favorable resolution of foreign tax matters. For the six months ended April 30, 2005, the $160 million benefit included the $63 million deferred tax adjustment in the second fiscal quarter and $105 million resulting from an agreement with the Internal Revenue Service ("IRS") in the first fiscal quarter, which reduced accruals of U.S. taxes on earnings outside the U.S. These adjustments were offset in part by other net unfavorable income tax adjustments totaling $8 million.

        Also benefiting the effective tax rates for the three and six months ended April 30, 2005 were certain pre-tax charges of $101 million and $217 million, respectively. The $101 million pre-tax charge for the three months ended April 30, 2005 consisted of our estimate of taxes and interest associated with a pre-acquisition Compaq sales and use tax audits for the years 1998-2002. The $217 million of pre-tax charges for the six months ended April 30, 2005 also included the $116 million pre-tax charge recorded in the first quarter of fiscal 2005 associated with the dispute settlement with Intergraph. As both items are deductible from U.S. taxable income at the statutory rate of 35%, the effective tax rates for the three and six months ended April 30, 2005 were reduced by an additional 2.1 percentage points and 2.3 percentage points, respectively.

Provision for Taxes

        Our effective tax rate was 10.2% and 19.5% for the three months ended January 31, 2005 and 2004, respectively. Our effective tax rate generally differs from the U.S. federal statutory rate of 35% due to the tax rate benefits of certain earnings from operations in lower-tax jurisdictions throughout the world for which no U.S. taxes have been provided because such earnings are planned to be re-invested indefinitely outside the U.S. However, other items further reduced the effective tax rate for the 2005 period, including $61 million in net adjustments to previously estimated tax liabilities. An agreement with the Internal Revenue Service resulted in a $105 million adjustment primarily to reduce accruals of U.S. taxes on earnings outside the U.S. This was offset partly by $44 million in net unfavorable adjustments to previously estimated tax liabilities, predominantly in non-U.S. jurisdictions. Also benefiting the effective tax rate for the first quarter of fiscal 2005 was the dispute settlement with Intergraph. We recorded a pre-tax charge of $116 million related to this settlement. As the settlement is deductible from U.S. taxable income at the statutory rate of 35%, the effective tax rate for the first quarter of fiscal 2005 was reduced by an additional 2.4%.