Hewlett-Packard (HPQ)

Retirement Benefits

        Our pension and other post-retirement benefit costs and obligations are dependent on various assumptions. Our major assumptions relate primarily to discount rates, salary growth, long-term return on plan assets and medical cost trend rates. We base the discount rate assumption on current investment yields of high quality fixed income investments during the retirement benefits maturity period. The salary growth assumptions reflect our long-term actual experience and future and near-term outlook. Long-term return on plan assets is determined based on historical portfolio results and management's expectation of the future economic environment, as well as target asset allocations.

        In the beginning of fiscal 2008, we implemented a liability-driven investment strategy for the HP U.S. defined benefit pension plan, which was frozen effective December 31, 2007. As part of the strategy, we transitioned our investment allocation for that plan to predominantly fixed income assets. In fiscal 2008, we acquired EDS. The EDS U.S. defined benefit plan assets were invested predominantly in public equity and alternative investments. At the end of fiscal 2009, the assets of the HP and EDS plans were merged, resulting in a portfolio with a blend of fixed income, equities and alternatives. The expected return on the plan assets, used in calculating the net benefit cost, is 7.99% for fiscal 2010, which reflects the target asset allocation of the merged portfolio.

        Our medical cost trend assumptions are developed based on historical cost data, the near-term outlook and an assessment of likely long-term trends. Actual results that differ from our assumptions are accumulated and are amortized generally over the estimated future working life of the plan participants.

        Our major assumptions vary by plan and the weighted-average rates used are set forth in Note 16 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference. Each assumption has different sensitivity characteristics, and, in general, changes, if any, have moved in the same direction over the last several years. For fiscal 2009, changes in the weighted-average rates for the HP benefit plans would have had the following impact on our net periodic benefit cost:

•

A decrease of 25 basis points in the long-term rate of return would have increased our net benefit cost by approximately $43 million;



•

A decrease of 25 basis points in the discount rate would have increased our net benefit cost by approximately $71 million; and



•

An increase of 25 basis points in the future compensation rate would have increased our net benefit cost by approximately $15 million.

Retirement Benefits

        Our pension and other post-retirement benefit costs and obligations are dependent on various assumptions. Our major assumptions relate primarily to discount rates, salary growth, long-term return on plan assets and medical cost trend rates. We base the discount rate assumption on current investment yields of high quality fixed income investments during the retirement benefits maturity period. The salary growth assumptions reflect our long-term actual experience and future and near-term outlook. Long-term return on plan assets is determined based on historical portfolio results and management's expectation of the future economic environment, as well as target asset allocations.

        In the beginning of fiscal 2008, we implemented a liability-driven investment strategy for the HP U.S. defined benefit pension plan, which was frozen effective December 31, 2007. As part of the strategy, we have transitioned our investment allocation for that plan to predominantly fixed income assets. The expected return on the plan assets, used in calculating the net benefit cost, is 6.10% for fiscal 2009, which reflects this change in our asset allocation policy.

        Our medical cost trend assumptions are developed based on historical cost data, the near-term outlook and an assessment of likely long-term trends. Actual results that differ from our assumptions are accumulated and are amortized generally over the estimated future working life of the plan participants.

        Our major assumptions vary by plan and the weighted-average rates used are set forth in Note 15 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference. Each assumption has different sensitivity characteristics, and, in general, changes, if any, have moved in the

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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)

same direction over the last several years. For fiscal 2008, changes in the weighted-average rates for the HP benefit plans would have had the following impact on our net periodic benefit cost:

•

A decrease of 25 basis points in the long-term rate of return would have increased our net benefit cost by approximately $36 million;



•

A decrease of 25 basis points in the discount rate would have increased our net benefit cost by approximately $46 million; and



•

An increase of 25 basis points in the future compensation rate would have increased our net benefit cost by approximately $12 million.

Retirement Benefits

        Our pension and other post-retirement benefit costs and obligations are dependent on various assumptions. Our major
assumptions relate primarily to discount rates, salary growth, long-term return on plan assets and medical cost trend rates. We base the discount rate assumption on current investment
yields of high quality fixed income investments during the retirement benefits maturity period. The salary growth assumptions reflect our long-term actual experience and future and
near-term outlook. Long-term return on plan assets is determined based on historical portfolio results and management's expectation of the future economic environment, as well
as target asset allocations.

        In
the beginning of fiscal 2008, we implemented a liability-driven investment strategy for the HP U.S. defined benefit pension plan, which was frozen effective December 31, 2007.
As part of the strategy, we have transitioned our investment allocation for that plan to predominantly fixed income assets. The expected return on the plan assets, used in calculating the net benefit
cost, is 6.10% for fiscal 2009, which reflects this change in our asset allocation policy.

        Our
medical cost trend assumptions are developed based on historical cost data, the near-term outlook and an assessment of likely long-term trends. Actual
results that differ from our assumptions are accumulated and are amortized generally over the estimated future working life of the plan participants.

        Our
major assumptions vary by plan and the weighted-average rates used are set forth in Note 15 to the Consolidated Financial Statements in Item 8, which is incorporated
herein by reference. Each assumption has different sensitivity characteristics, and, in general, changes, if any, have moved in the

45

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)

same
direction over the last several years. For fiscal 2008, changes in the weighted-average rates for the HP benefit plans would have had the following impact on our net periodic benefit
cost:

•

A decrease of 25 basis points in the long-term rate of return would have increased our net benefit cost by
approximately $36 million;




•

A decrease of 25 basis points in the discount rate would have increased our net benefit cost by approximately
$46 million; and




•

An increase of 25 basis points in the future compensation rate would have increased our net benefit cost by approximately
$12 million.

Retirement Benefits

        Our pension and other post-retirement benefit costs and obligations are dependent on various assumptions. Our major assumptions relate primarily to discount rates, salary growth, long-term return on plan assets and medical cost trend rates. We base the discount rate assumption on current investment yields of high quality fixed income investments during the retirement benefits maturity period. The salary growth assumptions reflect our long-term actual experience and future and near-term outlook. Long-term return on plan assets is determined based on historical portfolio results and management's expectation of the future economic environment, as well as target asset allocations. In the beginning of fiscal 2008, we implemented a liability-driven investment strategy for the U.S. defined benefit pension plan, which will be frozen by December 31, 2007 and is currently overfunded. As part of the strategy, we have transitioned our equity allocation to predominantly fixed income assets. The expected return on the plan assets, used in calculating the net benefit cost, has been reduced from 8.3% to 6.3% for fiscal 2008 to reflect the changes in our asset allocation policy. Our medical cost trend assumptions are developed based on historical cost data, the near-term outlook and an assessment of likely long-term trends. Actual results that differ from our assumptions are accumulated and are amortized generally over the estimated future working life of the plan participants.

        Our major assumptions vary by plan and the weighted-average rates used are set forth in Note 15 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference. Each assumption has different sensitivity characteristics, and, in general, changes, if any, have moved in the same direction over the last several years. For fiscal 2007, changes in the weighted-average rates would have had the following impact on our net periodic benefit cost:

•

A decrease of 25 basis points in the long-term rate of return would have increased our net benefit cost by approximately $33 million;



•

A decrease of 25 basis points in the discount rate would have increased our net benefit cost by approximately $51 million; and



•

An increase of 25 basis points in the future compensation rate would have increased our net benefit cost by approximately $21 million.

Retirement Benefits

        Our pension and other post-retirement benefit costs and obligations are dependent on various assumptions. Our major assumptions relate primarily to discount rates, salary growth, long-term return on plan assets and medical cost trend rates. We base the discount rate assumption on current investment yields of high quality fixed income investments during the retirement benefits maturity period. The salary growth assumptions reflect our long-term actual experience and future and near-term outlook. Long-term return on plan assets is determined based on historical portfolio results and management's expectation of the future economic environment, as well as target asset allocations. Our medical cost trend assumptions are developed based on historical cost data, the near-term outlook and an assessment of likely long-term trends. Actual results that differ from our assumptions are accumulated and are amortized generally over the estimated future working life of the plan participants.

        Our major assumptions vary by plan and the weighted average rates used are set forth in Note 15 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference. Each assumption has different sensitivity characteristics, and, in general, changes, if any, have moved in the

41

same direction over the last several years. For fiscal 2006, changes in the weighted average rates would have had the following impact on our net periodic benefit cost:

•

a decrease of 25 basis points in the long-term rate of return would have increased our net benefit cost by approximately $31 million;



•

a decrease of 25 basis points in the discount rate would have increased our net benefit cost by approximately $49 million; and



•

an increase of 25 basis points in the future compensation rate would have increased our net benefit cost by approximately $27 million.

Retirement Benefits

        Our pension and other post-retirement benefit costs and obligations are dependent on various assumptions. Our major assumptions primarily relate to discount rates, salary growth, long-term return on plan assets and medical cost trend rates. We base the discount rate assumption on current investment yields of high quality fixed income investments during the retirement benefits maturity

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period. The salary growth assumptions reflect our long-term actual experience and future and near-term outlook. Long-term return on plan assets is determined based on historical portfolio results and management's expectation of the future economic environment, as well as target asset allocations. Our medical cost trend assumptions are developed based on historical cost data, the near-term outlook and an assessment of likely long-term trends. Actual results that differ from our assumptions are accumulated and are generally amortized over the estimated future working life of the plan participants.

        Our major assumptions vary by plan and the weighted average rates used are set forth in Note 15 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference. Each assumption has different sensitivity characteristics, and, in general, changes, if any, have moved in the same direction over the last several years. For fiscal 2005, a change in the weighted average rates would have had the following impact on our net periodic benefit cost:

•

a decrease of 25 basis points in the long-term rate of return would have increased our net benefit cost by approximately $24 million;



•

a decrease of 25 basis points in the discount rate would have increased our net benefit cost by approximately $50 million; and



•

an increase of 25 basis points in the future compensation rate would have increased our net benefit cost by approximately $38 million.

Retirement Benefits

        Our pension and other post-retirement benefit costs and obligations are dependent on various actuarial assumptions used in calculating such amounts. These assumptions relate to discount rates, salary growth, long-term return on plan assets, medical cost trend rates and other factors. We base the discount rate assumption on current investment yields on high quality fixed income investments. The salary growth assumptions reflect our long-term actual experience and future and near-term outlook. Long-term return on plan assets is determined based on historical portfolio results and management's expectation of the future economic environment, as well as target asset allocations. Our medical cost trend assumptions are developed based on historical cost data, the near-term outlook and an assessment of likely long-term trends. Actual results that differ from our assumptions are accumulated and amortized over the estimated future working life of the plan participants.

        Our major assumptions for determining net benefit cost for pension and post-retirement plans include the long-term return on plan assets, the discount rate for determining plan obligations and the future expected average increase in compensation levels. These rates vary by plan and the weighted average rates used are set forth in Note 15 to the Consolidated Financial Statements. Each assumption has different sensitivity characteristics, and, in general, changes, if any, have moved in the same direction over the last several years. For fiscal 2004, a change in the weighted average rates would have had the following impact on our net benefit cost:

•

a decrease of 25 basis points in the long-term rate of return would have increased our net benefit cost by approximately $20 million;



•

a decrease of 25 basis points in the discount rate would have increased our net benefit cost by approximately $50 million; and



•

a decrease of 25 basis points in the future compensation rate would have decreased our net benefit cost by approximately $40 million.