The following discussion should be read in conjunction with the Consolidated Condensed Financial Statements and the related notes that appear elsewhere in this document.

OVERVIEW

We are a leading global provider of products, technologies, software, solutions and services to individual consumers, small- and medium-sized businesses ("SMBs"), and large enterprises, including customers in the public and education sectors. Our offerings span:

º •
º personal computing and other access devices;

º •
º imaging and printing-related products and services;

º •
º enterprise information technology infrastructure, including enterprise storage and server technology, and software that optimizes business technology investments; and

º •
º multi-vendor customer services, including technology support and maintenance, consulting and integration and outsourcing services.

We have seven business segments for financial reporting purposes: Services, Enterprise Storage and Servers ("ESS"), HP Software, the Personal Systems Group ("PSG"), the Imaging and Printing Group ("IPG"), HP Financial Services ("HPFS"), and Corporate Investments. Services, ESS and HP Software are reported collectively as a broader Technology Solutions Group ("TSG"). While TSG is not an operating segment, we sometimes provide financial data aggregating the segments within TSG in order to provide a supplementary view of our business.

The operating framework within which we manage our businesses and which guides our strategies is based on the disciplined management of three business levers: targeted growth, operational efficiency and strategic deployment of capital. Although we have made progress towards our goals in recent periods, there are still many areas in which we believe that we can improve. To implement this operating framework, we are focused on the following initiatives:

º •
º We are engaged in a process of examining every function and every business in the company in order to optimize efficiency and reduce cost;

º •
º We are executing on our ongoing program to consolidate real estate locations worldwide to fewer core sites in order to reduce our IT spending and real estate costs;

º •
º We are aligning our resources and reinvesting a portion of the cost savings from these initiatives to build our market share in emerging markets and to expand our sales coverage to drive growth in mature markets;

º •
º We are building and expanding our services organization, which has been substantially augmented through our acquisition of Electronic Data Systems Corporation ("EDS"), to support our technology businesses and enable us to provide comprehensive solutions to our customers;

º •
º We are developing a global delivery structure to take advantage of regions where advanced technical expertise is available at lower costs; and

In September 2008, we announced a restructuring plan to gain efficiencies following the EDS acquisition. The restructuring plan will be implemented over four years and includes a targeted reduction in headcount of approximately 25,000 employees over that period, with the majority of the reductions occurring by the end of fiscal 2009. Our plan includes replacing roughly half of these positions in order to optimize our global footprint. As part of this plan, we recorded $1.8 billion in restructuring costs in the fourth quarter of fiscal 2008, $1.5 billion of which was booked to goodwill and $0.3 billion of which was recorded as a restructuring charge.

In February 2009, we announced additional changes to our compensation and benefit programs in response to the current challenges of the global economy and the resulting effect on our revenues. As part of these changes, we will reduce the base pay of most of our U.S. employees effective in the second quarter of fiscal 2009 and the base pay of many of our non-U.S. employees in future periods in compliance with local laws. Beginning in the second quarter of fiscal 2009, we will also cap matching contributions under the HP 401(k) Plan for all U.S. employees at 4% of eligible compensation and will fund those matching contributions quarterly on a discretionary basis based on our financial performance. In addition, effective in the third quarter of fiscal 2009, we will modify our employee stock purchase plan to eliminate the 15% discount currently applicable to purchases made under the plan.

We are continuing to evaluate our businesses and current market conditions and may consider additional restructuring actions in future periods.

In terms of how our execution has translated into financial performance, the following provides an overview of our key financial metrics in the first quarter of fiscal 2009:

                                                                  TSG
                        HP Consolidated      ESS       Services     HP Software      Total       PSG        IPG       HPFS
                                                      In millions, except per share amounts
Net revenue              $        28,800   $ 3,948     $   8,746     $       878    $ 13,572   $ 8,787    $ 5,981    $  636
Year-over-year net
revenue % increase                   1.2 %   (18.1 )%      115.8 %          (7.3 )%     38.2 %   (18.6 )%   (18.7 )%   (0.9 )%
Earnings from
operations               $         2,494   $   405     $   1,123     $       140    $  1,668   $   435    $ 1,105    $   41
Earnings from
operations as a % of
net revenue                          8.7 %    10.3 %        12.8 %          15.9 %      12.3 %     5.0 %     18.5 %     6.4 %
Net earnings                       1,854
Net earnings per
share
   Basic                 $          0.77
   Diluted               $          0.75

Cash and cash equivalents at January 31, 2009 totaled $11.2 billion, an increase of $1.0 billion from October 31, 2008. The increase for the first three months of fiscal 2009 was due primarily to $2.0 billion proceeds from the issuance of debt, and $1.1 billion cash provided from operations, partially offset by $1.2 billion of cash used to repurchase common stock and $0.7 billion net investment in property, plant and equipment.

We intend the discussion of our financial condition and results of operations that follows to provide information that will assist in understanding our Consolidated Condensed Financial Statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our Consolidated Condensed Financial Statements.

For a further discussion of factors that could impact operating results, see the section entitled "Factors That Could Affect Future Results" below.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Condensed Financial Statements, which we have prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of significant estimates with the Audit Committee of our Board of Directors. Actual results may differ from these estimates under different assumptions or conditions.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. Management believes that there have been no significant changes during the three months ended January 31, 2009 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended October 31, 2008. However, we have expanded our critical accounting policy disclosures beginning this quarter to include the following summary of our existing policy relating to loss contingencies. This summary previously has appeared, and continues to appear, as part of our disclosures regarding litigation and contingencies in Note 15 to the Consolidated Condensed Financial Statements in Item 1.

Loss Contingencies

We are involved in various lawsuits, claims, investigations and proceedings that arise in the ordinary course of business. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 5, "Accounting for Contingencies", we record a provision for a liability when we believe that it is both probable that a liability has been incurred and the amount can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. We review these provisions at least quarterly and adjust these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information. Litigation is inherently unpredictable and is subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to have been incorrect, it could have a material impact on our results of operations, financial position and cash flows.

ACCOUNTING PRONOUNCEMENTS

As previously reported in our 2008 Annual Report on Form 10-K, we recognized the funded status of our benefit plans at October 31, 2007 in accordance with the recognition provisions of SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans-An Amendment of Financial Accounting Standards Board ("FASB") Statements No. 87, 88, 106 and 132(R)" ("SFAS 158"). In addition to the recognition provisions, SFAS 158 also requires companies to

measure the funded status of the plan as of the date of their fiscal year end, effective for fiscal years ending after December 15, 2008. We will adopt the measurement provisions of SFAS 158 effective October 31, 2009 for the HP pension and post retirements plans. We do not expect the adoption of the measurement provisions of SFAS 158 will have a material effect on our consolidated results of operations and financial condition.

In February 2008, the FASB issued FASB Staff Position ("FSP") SFAS 157-2, "Effective Date of FASB Statement No. 157" ("FSP SFAS 157-2"). FSP SFAS 157-2 delays the effective date of SFAS No. 157, "Fair Value Measurements" ("SFAS 157") to fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). As a result of adoption of FSP SFAS 157-2, we will adopt SFAS 157 for nonfinancial assets and nonfinancial liabilities in the first quarter of fiscal 2010. Although we will continue to evaluate the application of SFAS 157 to nonfinancial assets and nonfinancial liabilities, we do not expect the adoption of SFAS 157 with respect to nonfinancial assets and nonfinancial liabilities will have a material impact on our consolidated results of operations and financial condition.

In December 2007, the FASB issued SFAS 141 (revised 2007), "Business Combinations" ("SFAS 141(R)"). SFAS 141(R) expands the definition of a business and a business combination; requires recognition of assets acquired, liabilities assumed, and contingent consideration at their fair value on the acquisition date; requires acquisition-related expenses and restructuring costs to be recognized separately from the business combination and expensed as incurred; requires in-process research and development to be capitalized at fair value as an intangible asset; and requires that changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period be recognized as a component of provision for taxes. SFAS 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141(R) is effective for fiscal years beginning on or after December 15, 2008 and will be adopted by us in the first quarter of fiscal 2010. We are currently evaluating the potential impact of the adoption of SFAS 141(R) on our consolidated results of operations and financial condition, which will be largely dependent on the size and nature of the business combinations completed after the adoption of this statement. Among other potential impacts, we currently believe that the adoption of SFAS 141(R) will result in the recognition of certain types of expenses in our results of operations that are currently capitalized pursuant to existing accounting standards.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements-an amendment of Accounting Research Bulletin No. 51" ("SFAS 160"). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008 and will be adopted by us in the first quarter of fiscal 2010. We are currently evaluating the potential impact, if any, of the adoption of SFAS 160 on our consolidated results of operations and financial condition.

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" ("SFAS 161"). SFAS 161 applies to all derivative instruments and related hedged items accounted for under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 161 requires entities to provide greater transparency about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and how derivative instruments and related hedged items affect an entity's financial position, results of

operations and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 and will be adopted by us in the second quarter of fiscal 2009. We will present the required disclosures in the prescribed format on a prospective basis upon adoption. We do not expect the adoption of SFAS 161 will have a material effect on our consolidated results of operations and financial condition.

In May 2008, the FASB issued FSP Accounting Principles Board ("APB") 14-1 "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability
(debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer's non-convertible debt borrowing rate. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 on a retroactive basis and will be adopted by us in the first quarter of fiscal 2010. We currently do not have any outstanding convertible debt instruments that are subject to the provisions of FSP APB 14-1. However, our U.S. dollar zero-coupon convertible notes that were redeemed in full in March 2008 are subject to the provisions of FSP APB 14-1. As a result, upon adoption of FSP APB 14-1 in the first quarter of fiscal 2010, our fiscal 2008 consolidated results of operations and financial condition will be affected on a retroactive basis. We do not expect the adoption of FSP APB 14-1 will have a material effect on our consolidated results of operations and financial condition.

In June 2008, the FASB issued FSP Emerging Issues Task Force ("EITF") 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities" ("FSP EITF 03-6-1"). FSP EITF 03-6-1 clarifies that share-based payment awards that entitle their holders to receive nonforfeitable dividends or dividend equivalents before vesting should be considered participating securities. We have granted and expect to continue to grant restricted stock that contain non-forfeitable rights to dividends and will be considered participating securities upon adoption of FSP EITF 03-6-1. As participating securities, we will be required to include these instruments in the calculation of our basic earnings per share ("EPS"), and we will need to calculate basic EPS using the "two-class method." Restricted stock is currently included in our dilutive EPS calculation using the treasury stock method. The two-class method of computing EPS is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008 on a retrospective basis and will be adopted by us in the first quarter of fiscal 2010. We are currently evaluating the potential impact, if any, the adoption of FSP EITF 03-6-1 will have on our calculation of EPS.

In November 2008, the FASB ratified EITF Issue No. 08-7, "Accounting for Defensive Intangible Assets" ("EITF 08-7"). EITF 08-7 applies to defensive intangible assets, which are acquired intangible assets that the acquirer does not intend to actively use but intends to hold to prevent its competitors from obtaining access to them. As these assets are separately identifiable, EITF 08-7 requires an acquiring entity to account for defensive intangible assets as a separate unit of accounting. Defensive intangible assets must be recognized at fair value in accordance with SFAS 141(R) and SFAS 157. EITF 08-7 is effective for defensive intangible assets acquired in fiscal years beginning on or after December 15, 2008 and will be adopted by us in the first quarter of fiscal 2010. We are currently evaluating the potential impact, if any, of the adoption of EITF 08-7 on our consolidated results of operations and financial condition.

In December 2008, the FASB issued FSP SFAS 132(R)-1, "Employer's Disclosures about Postretirement Benefit Plan Assets," ("FSP SFAS 132(R)-1"). FSP SFAS 132(R)-1 requires additional disclosures about assets held in an employer's defined benefit pension or other postretirement plan. FSP SFAS 132(R)-1 is effective for fiscal years ending after December 15 2009 and will be adopted by us in the first quarter of fiscal 2010. We will present the required disclosures in the prescribed format

on a prospective basis upon adoption. We do not expect the adoption of FSP FAS 132(R)-1 will have a material effect on our consolidated results of operations and financial condition.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

During the first quarter of fiscal 2009, we adopted the following accounting standards, none of which had a material effect on our consolidated results of operations during such period or financial condition at the end of such period:

º •
º SFAS No. 157;

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º FSP SFAS 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurment under Statement 13" ("FSP SFAS 157-1");

º •
º FSP SFAS 157-2;

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º FSP SFAS 157-3, "Determining the Fair value of a Financial Asset when the Market for That Asset is not Active" ("FSP SFAS 157-3");

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º SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115" ("SFAS 159"); and

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º EITF 07-3, "Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities".

RESULTS OF OPERATIONS

    Results of operations in dollars and as a percentage of net revenue were as
follows:

                                                     Three months ended January 31
                                                       2009                2008(1)
                                                              In millions
  Net revenue                                   $ 28,800     100.0 %  $ 28,467     100.0 %
  Cost of sales(2)                                22,069      76.6 %    21,444      75.3 %

  Gross profit                                     6,731      23.4 %     7,023      24.7 %
  Research and development                           732       2.5 %       898       3.2 %
  Selling, general and administrative              2,893      10.1 %     3,296      11.6 %
  Amortization of purchased intangible assets        412       1.4 %       206       0.7 %
  In-process research and development charges          6         -           -         -
  Restructuring                                      146       0.5 %        10         -
  Acquisition-related charges                         48       0.2 %         -         -

  Earnings from operations                         2,494       8.7 %     2,613       9.2 %
  Interest and other, net                           (232 )    (0.8 )%       72       0.2 %

  Earnings before taxes                            2,262       7.9 %     2,685       9.4 %
  Provision for taxes                                408       1.5 %       552       1.9 %

  Net earnings                                  $  1,854       6.4 %  $  2,133       7.5 %

º (2)
º Cost of products, cost of services and financing interest.

Net Revenue

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

                                                Three months ended
                                                 January 31, 2009
                                                Percentage Points
              Services                                         16.5
              Corporate Investments/Other                      (0.1 )
              HP Software                                      (0.3 )
              Enterprise Storage and Servers                   (3.1 )
              Imaging and Printing Group                       (4.8 )
              Personal Systems Group                           (7.0 )
              HP Financial Services                               -

              Total HP                                          1.2

For the three months ended January 31, 2009, the global slowdown of IT and consumer spending impacted each of our segments as net revenue increased only 1.2% from the prior-year comparable period (4.2% on a constant currency basis). The Services segment was the largest contributor to total HP net revenue growth as a result of the acquisition of EDS. U.S. net revenue increased 15% to $10.1 billion for the first quarter of fiscal 2009, while international net revenue decreased 5% to $18.7 billion.

The net revenue increase in Services was due primarily to revenue increases in infrastructure technology outsourcing, application services and business process outsourcing primarily as a result of our acquisition of EDS in the fourth quarter of fiscal 2008. Net revenue in technology services was flat due primarily to unfavorable currency impacts, offset by growth in extended warranty and IT solution support services revenue.

Net revenue in Corporate Investments and Other declined as a result of the slowing IT spend environment.

Net revenue in HP Software declined in both the Business Technology Optimization ("BTO") and other software business units due primarily to revenue declines in license and services partially offset by increases in support revenue.

The net revenue decline in ESS was driven by declines in industry standard servers, business critical systems and storage. The slowing global economy drove the declines in each of the business units. Industry standard servers experienced both volume and average unit price declines and was the largest business unit contributor to the decline in ESS revenue.

IPG experienced net revenue declines across each of the commercial and consumer hardware business units along with the supplies business unit. Volume declines across each of the business units were a result of the softness in both the business and consumer economic environments.

The PSG net revenue decline was the result of the overall slowdown in the global economy, including a reversing trend in the growth in emerging markets. PSG volumes declined by 4% while average selling prices ("ASPs") declined in both consumer clients and in commercial clients.

The HPFS net revenue decrease was due to unfavorable currency movement.

Gross Margin
. . .