Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and Results of Operations

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, and large enterprises, including customers in the public and education sectors. Our offerings span:

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º personal computing and other access devices;

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º imaging and printing-related products and services;

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

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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:

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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;

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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;

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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;

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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;

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

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º We are repurchasing shares of our common stock under an ongoing program to manage the dilution created by shares issued under employee stock plans as well as to repurchase shares opportunistically.

In September 2008, we announced a restructuring plan to gain efficiencies following the EDS acquisition. The restructuring plan is expected to be implemented over four years from the acquisition date 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 addition, we expect incremental real estate and acquisition related charges of approximately $1 billion associated with the acquisition of EDS. Of this amount, we recorded $0.2 billion of restructuring charges to goodwill in the second quarter of fiscal 2009. The remainder of the charges will be recorded over the next two and a half years.

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 reduced the base pay of most of our U.S. employees effective in the second quarter of fiscal 2009 and will reduce 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 also capped matching contributions under the HP 401(k) Plan for all U.S. employees at 4% of eligible compensation and will fund these matching contributions quarterly on a discretionary basis based on our financial performance. In addition, we modified our employee stock purchase plan to eliminate the 15% discount applicable to purchases made under the plan effective in the third quarter of fiscal 2009.

In May 2009, we announced an additional restructuring plan to eliminate approximately 2% of our workforce to structurally change and improve the effectiveness of our product businesses. The restructuring plan will be implemented during the 12-month period ending in May 2010 and, taking into account the adoption of this plan and the impact of the real estate and acquisition-related actions noted above, we expect to record a charge of approximately $0.12 to $0.14 per share in the third quarter of fiscal 2009.

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

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