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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended July 31, 2002

OR

For the transition period from                              to                             

Commission file number: 1-4423

HEWLETT-PACKARD COMPANY
(Exact name of registrant as specified in its charter)

(650) 857-1501
(Registrant's telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12-months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
INDEX

        This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2, contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause the results of HP and its consolidated subsidiaries to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including any projections of earnings, revenue, synergies, accretion, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations, including the execution of integration and restructuring plans; any statement concerning proposed new products, services, developments or industry rankings; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. The risks, uncertainties and assumptions referred to above include the performance of contracts by customers and partners; employee management issues; the challenge of managing asset levels, including inventory; the difficulty of aligning expense levels with revenue changes; and other risks that are described herein and that are otherwise described from time to time in HP's Securities and Exchange Commission reports filed subsequent to HP's Annual Report on Form 10-K, as amended on January 30, 2002, for the fiscal year ended October 31, 2001, except as superseded by "Factors that Could Affect Future Results" set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of this report. HP assumes no obligation and does not intend to update these forward-looking statements.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Consolidated Condensed Statement of Earnings
(Unaudited)
(In millions, except per share amounts)

The accompanying notes are an integral part of these consolidated condensed financial statements.

3

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Consolidated Condensed Balance Sheet
(In millions, except par value)

The accompanying notes are an integral part of these consolidated condensed financial statements.

4

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Consolidated Condensed Statement of Cash Flows
(Unaudited)
(In millions)

The accompanying notes are an integral part of these consolidated condensed financial statements.

5

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements

(Unaudited)

Note 1: Basis of Presentation and Significant Accounting Policies

Basis of Presentation

        In the opinion of management, the accompanying Consolidated Condensed Financial Statements for Hewlett-Packard Company and its consolidated subsidiaries ("HP") contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly its financial position as of July 31, 2002 and October 31, 2001, its results of operations for the three- and nine-month periods ended July 31, 2002 and 2001, and its cash flows for the nine-month periods ended July 31, 2002 and 2001. Certain reclassifications have been made to prior year balances in order to conform to the current year presentation.

        On May 3, 2002, HP acquired all of the outstanding stock of Compaq Computer Corporation ("Compaq"), a leading global provider of information technology products, services and solutions for enterprise customers, in exchange for 0.6325 shares of HP common stock for each outstanding share of Compaq stock and the assumption of options based on the same ratio. On March 22, 2002, HP acquired substantially all of the outstanding stock of Indigo N.V. ("Indigo") not previously owned by HP in exchange for HP common stock, options, and non-transferable contingent value rights ("CVR"). In accordance with Statement of Financial Accounting Standards ("SFAS") No. 141, HP has included in its results of operations for the three- and nine-month periods ended July 31, 2002 the results of Compaq from May 3, 2002 and Indigo from March 22, 2002.

        The results of operations for the three- and nine-month periods ended July 31, 2002 are not indicative of the results to be expected for the full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Quantitative and Qualitative Disclosures About Market Risk" and the Consolidated Financial Statements and notes thereto included in Items 7, 7A and 8, respectively, of the Hewlett-Packard Company Annual Report on Form 10-K, as amended on January 30, 2002, for the fiscal year ended October 31, 2001, the audited consolidated financial statements of Compaq including Compaq's consolidated balance sheet at December 31, 2001 and 2000, the consolidated statements of income, cash flows and stockholders' equity for each of the three years in the period ended December 31, 2001, included in HP's Current Report on Form 8-K, dated February 14, 2002, and the unaudited condensed consolidated financial statements of Compaq including Compaq's condensed consolidated balance sheet at March 31, 2002, the condensed consolidated statements of income and cash flows for the three-month periods ended March 31, 2002 and 2001, included in HP's Current Report on Form 8-K, dated May 3, 2002.

        The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Significant Accounting Policies

Revenue Recognition

General

        Revenue is recognized when persuasive evidence of an arrangement exists, delivery occurs or services are rendered, the sales price is fixed or determinable and collectibility is reasonably assured. The following policies apply to HP's major categories of revenue transactions.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 1: Basis of Presentation and Significant Accounting Policies (Continued)

Products

        Product is considered delivered, and revenue is recognized when title and risk of loss have been transferred to the customer. Under the terms and conditions of the sale, this may occur either at the time of shipment or when the customer receives the product. Revenue is deferred when customer acceptance is uncertain, when significant obligations remain, or when undelivered products or services are essential to the functionality of delivered products. Revenue is reduced for estimated customer returns, price protection, rebates, and other offerings that occur under sales programs established with HP's distributors and resellers. The estimated cost of post-sale obligations, including basic product warranties, is accrued based on historical experience at the time revenue is recognized.

Services

        Revenue from support or maintenance contracts, including extended warranty programs, is recognized ratably over the contractual period. Amounts invoiced to customers in excess of revenue recognized on support or maintenance contracts are recorded as deferred revenue until the revenue recognition criteria are met. Revenue for time and material contracts is recognized as services are rendered. Revenue from long-term, fixed-price service contracts, such as certain outsourcing or consulting arrangements, is recognized over the contractual period on a percentage-of-completion basis. Revenue in excess of amounts invoiced on long-term, fixed-price contracts are recorded as unbilled receivables and are included in trade accounts receivable. Losses on fixed-price contracts are recognized in the period that the loss becomes evident.

Software

        Revenue from software is comprised of software licensing and post-contract customer support. Software revenue is allocated to the license and support elements using vendor specific objective evidence of fair value ("VSOE") or, in the absence of VSOE, the residual method. VSOE is generally determined based on the price charged when the element is sold separately. In the absence of VSOE of a delivered element, revenue is allocated first to the fair value of the undelivered elements and the residual revenue to the delivered elements. Revenue allocated to software licenses is recognized when the following four basic criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectibility is probable. Revenue allocated to post-contract support is recognized ratably over the term of the support contract, assuming the four basic criteria are met.

Financing Leases and Rental Revenue

        Revenue from the sale of equipment under sales-type leases and direct-financing leases is recognized as product revenue at the inception of the lease. Associated financing income is earned on an accrual basis under an effective annual yield method. Revenue from operating leases is recognized as the fees accrue.

Revenue Arrangements that Include Multiple Elements

        Revenue for transactions that include multiple elements such as hardware, software, consulting, training, and support agreements is allocated to each element based on its relative fair value and

7

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 1: Basis of Presentation and Significant Accounting Policies (Continued)

recognized when the revenue recognition criteria have been met for each element. Fair value is generally determined based on the price charged when the element is sold separately. In the absence of fair value of a delivered element, revenue is allocated first to the fair value of the undelivered elements and the residual revenue to the delivered elements. HP recognizes revenue for delivered elements only when the following criteria are satisfied: undelivered elements are not essential to the functionality of delivered elements, uncertainties regarding customer acceptance are resolved, and the fair value for all undelivered elements is known.

Foreign Currency Translation

        HP predominately uses the U.S. dollar as its functional currency. Foreign currency assets and liabilities are remeasured into U.S. dollars at end-of-period exchange rates, except for inventory, property, plant and equipment, other assets and deferred revenue, which are remeasured at historical exchange rates. Revenue and expenses are remeasured at average exchange rates in effect during each period, except for those expenses related to the previously noted balance sheet amounts, which are remeasured at historical exchange rates. Gains or losses from foreign currency remeasurement are included in net earnings. Certain foreign subsidiaries designate the local currency as their functional currency and related cumulative translation adjustments are included as a component of accumulated other comprehensive income.

Change in Accounting

        Effective May 1, 2002, HP adopted the straight-line method of depreciation for all property, plant and equipment placed into service beginning May 1, 2002. Property, plant and equipment placed into service prior to May 1, 2002 is depreciated using accelerated methods for buildings, improvements, machinery and equipment and the straight-line method for leasehold improvements and leased equipment. HP believes this change will allocate the costs of new property more appropriately in its financial results by better allocating these costs over the useful lives of these assets. In addition, the new method more closely conforms to the prevalent practices in the industries in which HP operates. The effect of this change was not material to HP's earnings or financial position for the three-month period ended July 31, 2002.

        HP adopted Securities and Exchange Commission Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements" in the fourth quarter of fiscal 2001, retroactive to November 1, 2000. Accordingly, HP restated its consolidated results of operations for the first three quarters of fiscal 2001, including a cumulative effect of change in accounting principle of $272 million, which was recorded as a reduction of net income as of the beginning of the first quarter of fiscal 2001.

Recent Accounting Pronouncements

        In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations be accounted for by the purchase method of accounting and changes the criteria for recognition of intangible assets acquired in a business combination. The provisions of SFAS 141 apply to all business combinations initiated after June 30, 2001. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized; however, these assets

8

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 1: Basis of Presentation and Significant Accounting Policies (Continued)

must be reviewed at least annually for impairment. Intangible assets with finite useful lives will continue to be amortized over their respective useful lives. The standard also establishes specific guidance for testing for impairment of goodwill and intangible assets with indefinite useful lives. The provisions of SFAS No. 142 will be effective for HP's fiscal year 2003. However, goodwill and intangible assets acquired after June 30, 2001 are subject immediately to the non-amortization provisions of SFAS No. 142. HP is currently in the process of evaluating the potential impact that the adoption of SFAS No. 142 will have on its consolidated financial position and results of operations.

        In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 amends existing accounting guidance on asset impairment and provides a single accounting model for long-lived assets to be disposed of. Among other provisions, the new rules change the criteria for classifying an asset as held-for-sale. The standard also broadens the scope of businesses to be disposed of that qualify for reporting as discontinued operations, and changes the timing of recognizing losses on such operations. The provisions of SFAS No. 144 will be effective for HP's fiscal year 2003 and will be applied prospectively.

        In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." Among other provisions, SFAS No. 145 rescinds SFAS 4 "Reporting Gains and Losses from Extinguishment of Debt." Accordingly, gains or losses from extinguishment of debt shall not be reported as extraordinary items unless the extinguishment qualifies as an extraordinary item under the criteria of Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Gains or losses from extinguishment of debt that do not meet the criteria of APB 30 should be reclassified to income from continuing operations in all prior periods presented. The provisions of SFAS No. 145 will be effective for HP's fiscal year 2003. Upon adoption, HP anticipates that it will reclassify gains on early extinguishment of debt and related taxes previously recorded as an extraordinary item to interest and other, net and provision for taxes, respectively.

        In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 provides guidance related to accounting for costs associated with disposal activities covered by SFAS No. 144 or with exit or restructuring activities previously covered by Emerging Issues Task Force Issue No. 94-3 ("EITF 94-3"), "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 supercedes EITF 94-3 in its entirety. SFAS No. 146 requires that costs related to exiting an activity or to a restructuring not be recognized until the liability is incurred. SFAS No. 146 will be applied prospectively to exit or disposal activities that are initiated after December 31, 2002.

Note 2: Net (Loss) Earnings Per Share

        HP's basic (loss) earnings per share ("EPS") is calculated based on net (loss) earnings and the weighted-average number of shares outstanding during the reporting period. Diluted EPS for the three- and nine-month periods ended July 31, 2001 includes additional dilution from potential issuance of common stock, such as stock issuable pursuant to the exercise of stock options outstanding and the conversion of debt. Diluted loss per share for the three- and nine-month periods ended July 31, 2002 is

9

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Net (Loss) Earnings Per Share (Continued)

based only on the weighted-average number of shares outstanding during each of the periods, as the inclusion of 14 million and 23 million common share equivalents, respectively, would have been antidilutive.

        The following table includes a reconciliation of the numerators and denominators of the basic and diluted EPS calculations:

10

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 3: Business Combinations

        In accordance with SFAS No. 141, HP allocates the purchase price of its acquisitions to the tangible assets, liabilities and intangible assets acquired, as well as in-process research and development, based on their estimated fair values. The excess purchase price over those fair values is recorded as goodwill. The fair value assigned to intangible assets acquired is based on valuations prepared by independent third party appraisal firms using estimates and assumptions provided by management. The goodwill recorded as a result of these acquisitions is not expected to be deductible for tax purposes. The assignment of goodwill to reporting units for these acquisitions has not yet been completed. In accordance with SFAS No. 142, goodwill and purchased intangibles with indefinite lives acquired after June 30, 2001 are not amortized but will be reviewed periodically for impairment. Purchased intangibles with finite lives will be amortized on a straight-line basis over their respective useful lives.

Compaq

        On May 3, 2002, HP acquired all of the outstanding stock of Compaq, a leading global provider of information technology products, services and solutions for enterprise customers, in exchange for 0.6325 of a share of HP common stock for each outstanding share of Compaq stock and the assumption of options based on the same ratio. In addition, HP assumed certain Compaq stock plans. The acquisition of Compaq is intended to enhance HP's combined competitive position in key industries, while strengthening its sales force and position in strategic markets. The merger is intended to enable HP to focus on strategic product and customer bases, achieve significant cost synergies and economies of scale and improve profitability of its combined Enterprise Systems, Personal Systems and Services businesses. The exchange ratio in the merger was derived from estimates of future revenue and earnings of the combined company assuming completion of the merger, and by measuring each of HP's and Compaq's relative contributions to achieving these forecasted results, in addition to measuring the relative ownership of the combined company implied by their contributions. This transaction resulted in the issuance of approximately 1.1 billion shares of HP common stock with a fair value of approximately $22.7 billion, the assumption of options to purchase approximately 200 million shares of HP common stock with a Black-Scholes fair value of approximately $1.4 billion and estimated direct transaction costs of $79 million. The fair value of HP common stock was derived using an average market price per share of HP common stock of $20.92, which was based on an average of the closing prices for a range of trading days (August 30, August 31, September 4, and September 5, 2001) around the announcement date (September 3, 2001) of the acquisition.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 3: Business Combinations (Continued)

        Based on a preliminary independent valuation, which may change upon receipt of the final valuation, the total purchase price of approximately $24.2 billion has been allocated as follows (in millions):

Amortizable intangible assets

        Of the total purchase price, approximately $3.5 billion has been allocated to amortizable intangible assets including customer contracts and developed and core technology. Customer contracts represent existing contracts that relate primarily to underlying customer relationships pertaining to the services provided by Compaq Global Services, including contractual customer service relationships, contractual managed services client relationships and contractual systems integration consulting client relationships. Customer lists and distribution agreements represent Compaq's relationships within the Enterprise and Personal Systems segments installed base and agreements with Enterprise value-added resellers. HP expects to amortize the fair value of these assets on a straight-line basis over a weighted average estimated useful life of approximately 9 years.

        Developed technology, which consists of products that have reached technological feasibility, includes products in most of Compaq's product lines, principally the Compaq Himalaya, Proliant, Enterprise Storage Array and AlphaServer products. Core technology and patents represent a combination of Compaq processes, patents and trade secrets developed through years of experience in design and development: clustering, fault tolerant systems, proprietary Alpha processor architecture and storage area networks. Compaq's technology and products are designed for hardware, software,

12

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 3: Business Combinations (Continued)

solutions, fault tolerant business critical solutions, communication products, and desktop and portable personal computers. HP intends to leverage this proprietary knowledge to develop new technology and improved products and manufacturing processes. HP expects to amortize the developed and core technology and patents on a straight-line basis over a weighted average estimated useful life of approximately 6 years.

Intangible assets with indefinite lives

        The estimated fair value of intangible assets with indefinite lives was $1.4 billion, consisting primarily of the estimated fair value allocated to the Compaq trade name. These intangible assets will not be amortized because the assets have indefinite remaining useful lives based on many factors and considerations, including the length of time that the Compaq name has been in use, the Compaq brand awareness and market position and the plans for continued use of the Compaq brand within a portion of HP's overall product portfolio.

In-process research & development

        Of the total purchase price, an estimate of $735 million has been allocated to in-process research & development ("IPR&D") and was expensed in the third quarter of fiscal 2002. Projects that qualify as IPR&D represent those that have not yet reached technological feasibility. Technological feasibility is defined as being equivalent to a beta-phase working prototype in which there is no remaining risk relating to the development.

        The value assigned to IPR&D was determined by considering the importance of each project to the overall development plan, estimating costs to develop the purchased IPR&D into commercially viable products, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value. The revenue estimates used to value the purchased IPR&D were based on estimates of the relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by Compaq and its competitors.

        The rates utilized to discount the net cash flows to their present values are based on Compaq's weighted average cost of capital. The weighted average cost of capital was adjusted to reflect the difficulties and uncertainties in completing each project and thereby achieving technological feasibility, the percentage of completion of each project, anticipated market acceptance and penetration, market growth rates and risks related to the impact of potential changes in future target markets. Based on these factors, discount rates that range from 25% - 42% were deemed appropriate for valuing the IPR&D.

        The estimates used in valuing IPR&D were based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. Accordingly, actual results may differ from the projected results.

13

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 3: Business Combinations (Continued)

Deferred compensation

        In accordance with the terms of Compaq's equity-based compensation plans, all of Compaq's outstanding options granted prior to September 1, 2001 vested upon Compaq shareowner approval of the acquisition. The intrinsic value of approximately $70 million as of May 3, 2002 of unvested Compaq options, which relates to options granted subsequent to August 31, 2001, has been allocated to deferred compensation in the purchase price allocation. Options assumed in conjunction with the acquisition had exercise prices ranging from $2.63 - $75.31, with a weighted average exercise price of $33.29 and a weighted average remaining contractual life of 7.1 years. Approximately 165 million of the approximately 200 million options assumed are fully vested.

Pro forma results

        The following unaudited pro forma financial information presents the combined results of operations of HP and Compaq as if the acquisition had occurred as of the beginning of the periods presented. The results for the three-month period ended July 31, 2002 include the results of Compaq from May 3, 2002 (the acquisition date). Due to different historical fiscal period ends for HP and Compaq, the results for the nine-month period ended July 31, 2002 combine the results of HP for the nine-month period ended July 31, 2002 and the historical quarterly results of Compaq for the six-month period ended March 31, 2002 and for the period May 3, 2002 (the acquisition date) to July 31, 2002. The historical results for the three-month period ended July 31, 2001 combine the historical results of HP for the three-month period ended July 31, 2001 and the historical results of Compaq for the three-month period ended June 30, 2001. The historical results for the nine-month period ended July 31, 2001 combine the historical results of HP for the nine-month period ended July 31, 2001 and the historical quarterly results of Compaq for the nine-month period ended June 30, 2001. Adjustments of $162 million, $110 million and $245 million have been made to the combined results of operations for the nine-month period ended July 31, 2002 and the three- and nine-month periods ended July 31, 2001, respectively, reflecting amortization of purchased intangibles, net of tax, as if the acquisition had occurred at the beginning of the periods presented. The unaudited pro forma financial information is not intended to represent or be indicative of the consolidated results of operations or financial condition of HP that would have been reported had the acquisition been completed as of the dates presented, and should not be taken as representative of the future consolidated results of operations or financial condition of HP.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 3: Business Combinations (Continued)

        The unaudited pro forma financial information above includes the following material, non-recurring charges: inventory writedowns of $137 million in the three- and nine-month periods ended July 31, 2002, acquisition-related charges of $378 million and $627 million in the three- and nine-month periods ended July 31, 2002, respectively, and $25 million in the nine-month period ended July 31, 2001; restructuring charges of $1,612 million and $1,630 million in the three- and nine-month periods ended July 31, 2002, respectively, and $493 million and $758 million in the three- and nine-month periods ended July 31, 2001, respectively; purchased IPR&D charges of $735 million and $793 million in the three- and nine-month periods ended July 31, 2002, respectively; net investment losses of $53 million and $62 million in the three- and nine-month periods ended July 31, 2002, respectively, and $1,998 in the nine-month period ended July 31, 2001; net divestiture losses of $131 million in the three- and nine-month periods ended July 31, 2001 and litigation settlement gains of $14 million in the three- and nine-month periods ended July 31, 2002 and litigation settlement losses of $400 million in the nine-month period ended July 31, 2001.

Indigo

        On March 22, 2002, HP acquired substantially all of the outstanding stock of Indigo N.V. ("Indigo") not previously owned by HP in exchange for HP common stock, options, and non-transferable contingent value rights ("CVR"). This acquisition is intended to strengthen HP's printer offering by adding high performance digital color printing systems. The total consideration for Indigo was $719 million, which included the fair value of HP common stock issued and options assumed, as well as direct transaction costs and the cost of an equity investment made by HP in Indigo in October 2000. Approximately 32 million shares of HP common stock and 53 million CVRs were issued in connection with this transaction. HP recorded approximately $499 million of goodwill and $153 million of amortizable purchased intangibles in conjunction with the acquisition and the previous equity investment. The purchased intangibles will be amortized over their useful lives, which range from five to eight years. In addition, HP recorded a pre-tax charge of approximately $58 million for acquired IPR&D in the second quarter of fiscal 2002 because technological feasibility had not been established and no future alternative uses existed. Results of operations for Indigo have been included prospectively from the date of the acquisition. Pro forma results of operations reflecting this acquisition have not been presented because the results of operations of Indigo are not material to HP's results of operations.

        The CVRs issued in conjunction with this acquisition entitle each holder to a one-time contingent cash payment of up to $4.50 per CVR, based on the achievement of certain cumulative revenue results over a three-year period. The liability related to the CVRs will be recorded as additional goodwill as payout thresholds are achieved. The future cash pay-out, if any, of the CVRs will be payable after a three-year period commencing on April 1, 2002.

Note 4: Legal Proceedings

Litigation Settlement

        On June 4, 2001, HP and Pitney Bowes Inc. ("Pitney Bowes") announced they had entered into agreements that resolved all pending patent litigation between the parties without admission of infringement and in connection therewith HP paid Pitney Bowes $400 million in cash on June 7, 2001.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 4: Legal Proceedings (Continued)

In addition, the companies entered into a technology licensing agreement and expect to pursue business and commercial relationships. The litigation related to Pitney Bowes' claims that HP's LaserJet printers infringed Pitney Bowes' character edge smoothing patent, and HP's claims that Pitney Bowes' copiers, fax machines, document management software and a postal metering machine infringed HP's patents.

Pending Litigation

        HP v. Cooper et al. is a lawsuit filed in federal court in California on or about March 23, 1998. Mr. Cooper claims that HP's LaserJet printers infringe his U.S. patent 5,424,780, which he asserts covers portions of the resolution enhancement technology employed in these printers. HP believes, based on an opinion from outside counsel, that it does not infringe the patent. HP has held discussions with the defendants but has not resolved the matter. Thereafter, the U.S. Patent Office agreed to reexamine the patent based on prior art identified by the parties. Litigation was stayed pending the outcome of the U.S. Patent Office reexamination. The U.S. Patent Office issued a reexamination certificate in the third quarter of fiscal 2002, which lifts the stay of litigation.

        Stevens v. HP is an unfair business practices consumer class action filed in federal court in California on or about July 31, 2000. Consumer class action lawsuits have been filed, in coordination with the original plaintiffs, in over 30 states. The various plaintiffs throughout the country claim to have purchased different models of HP inkjet printers over the past three years. The basic factual allegation of these actions is that when the affected consumer purchased HP printers, they received half-full or "economy" ink cartridges instead of full cartridges. Plaintiffs claim that HP's advertising, packaging and marketing representations for the printers led the consumers to believe they would receive full cartridges. These actions seek injunctive relief, disgorgement of profits, compensatory damages, punitive damages and attorney fees under various state unfair business practices statutes and common law claims of fraud and negligent misrepresentation. HP recently obtained summary judgment against the plaintiffs in the California action, which the plaintiffs are appealing. The matter has been certified as a class action in North Carolina state court.

        Alvis v. HP is a nationwide defective product consumer class action filed in a Texas state district court by a resident of eastern Texas in April 2001. In January 2000, a similar suit captioned LaPray v. Compaq was filed in state court in Texas against Compaq, and in May 2000 Sprung v. Compaq was filed in federal court in Colorado. These actions are part of a series of similar suits filed against several computer manufacturers. The basic allegation is that HP and Compaq sold computers containing floppy disk controller chips that fail to detect both overruns and underruns. That failure is alleged to result in data loss, data corruption or system failure. The plaintiffs in Alvis and LaPray seek injunctive relief, declaratory relief, rescission and attorneys' fees. In July 2001, a nationwide class was certified in the LaPray case. That class certification order was appealed by Compaq. In June 2002, the Beaumont Court of Appeals denied Compaq's appeal of the class certification order. On August 5, 2002, Compaq filed a petition for review with the Texas Supreme Court. A class certification hearing in Alvis has been set for November 2002. The Sprung case has been dismissed. In addition, HP and Compaq continue to provide information to the Federal government and state attorneys general in California and Illinois in response to inquiries regarding floppy disk controllers in computers sold to government entities.

        On or about December 27, 2001, Cornell University and the Cornell Research Foundation, Inc. filed an action against HP in federal court in New York alleging that HP's PA-RISC 8000 family of

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 4: Legal Proceedings (Continued)

microprocessors infringes a Cornell patent that describes a way of executing microprocessor instructions. This action seeks declaratory, injunctive and other relief. After reviewing the pertinent materials, HP believes that its products do not infringe the patent. Furthermore, HP believes Cornell's patent is invalid.

        A number of purported shareholder class actions were brought in 1998 against Compaq and certain present and former directors and officers of Compaq, on behalf of all persons who purchased Compaq common stock from July 10, 1997 through March 6, 1998. These actions were consolidated under the title Berger v. Compaq Computer Corporation, et al. in federal district court in Texas. The consolidated amended complaint alleges that defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by withholding information and making misleading statements about channel inventory, factoring of receivables and Compaq marketing programs in order to inflate the price of Compaq's common stock and further alleges that a number of individual defendants sold Compaq common stock at those purportedly inflated prices. In July 2000, the case was certified as a class action, but this action was later vacated by the Fifth Circuit Court of Appeals. Compaq has reached a mediated settlement with lead plaintiffs and their attorneys in the amount of approximately $29 million, of which $28 million is covered by insurance. The parties presented this settlement to the District Court for approval in June 2002. The final hearing on the fairness of the settlement is expected later this year.

        Litigation and arbitration proceedings are ongoing in various European jurisdictions as to whether certain products that enable the production of copies by private persons are subject to copyright levies in accordance with local copyright laws. The levies, if imposed, would vary based upon the type and quantity of products sold in particular jurisdictions. Products that are the subject of the claim in Germany include CD-writers, multi-function devices, personal computers and printers; in Belgium, CD media and CD-writers; in Spain, CD media; in Greece, any computer product, photocopiers and photocopying paper; and in Switzerland, CD media, DVD media and MP3 players. Other EU member countries that do not yet have levy schemes in place are expected to implement similar legislation. HP and various industry associations are opposing certain aspects of the levies.

        HP is involved in lawsuits, claims, investigations and proceedings, in addition to those identified above, consisting of patent, commercial and environmental matters, which arise in the ordinary course of business. The likelihood of all such additional cases, in the aggregate, having a material adverse effect on the results of operations or financial position of HP is expected to be remote. However, HP's evaluation of the likely impact of these pending disputes could change in the future.

Note 5: Net Investment Losses

        HP's investment portfolio includes equity and debt investments in public and privately-held emerging technology companies. Many of these emerging technology companies are still in the start-up or development stage. HP's investments in these companies are inherently risky because the technologies or products they have under development are typically in the early stages and may never become successful.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 5: Net Investment Losses (Continued)

        HP monitors its investment portfolio for impairment on a periodic basis. In the event that the carrying value of an investment exceeds its fair value and the decline in value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis for the investment is established. Fair values for investments in public companies are determined using quoted market prices. Fair values for investments in privately-held companies are estimated based upon one or more of the following: pricing models using historical and forecasted financial information and current market rates, liquidation values, the values of recent rounds of financing or quoted market prices of comparable public companies. In order to determine whether a decline in value is other-than-temporary, HP evaluates, among other factors: the duration and extent to which the fair value has been less than the carrying value; the financial condition of and business outlook for the company, including key operational and cash flow metrics, current market conditions and future trends in the company's industry, and the company's relative competitive position within the industry; and HP's intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value.

        Due to the economic downturn, the decline in value of certain investments in emerging technology companies was determined to be other-than-temporary. Accordingly, HP recorded impairment losses of $53 million and $68 million on its investments in both public and privately-held emerging technology companies in the three- and nine-month periods ended July 31, 2002. HP recorded no impairment losses for the three-month period ended July 31, 2001 and $365 million in impairment losses on its investments in both public and privately-held emerging technology companies in the nine-month period ended July 31, 2001. As of July 31, 2002, the carrying value of the portion of HP's remaining investment portfolio related to emerging technology companies was $272 million. Depending on market conditions, HP may incur additional charges on this investment portfolio in the future.

Note 6: Restructuring Charges

        During the third quarter of 2002, in connection with the acquisition of Compaq, HP's management approved and initiated plans to restructure the operations of both the pre-acquisition HP and pre-acquisition Compaq organizations ("restructuring plans") to eliminate certain duplicative activities, focus on strategic product and customer bases, reduce cost structure and better align product and operating expenses with existing general economic conditions. Consequently, HP recorded approximately $1.6 billion of costs associated primarily with exiting the activities of pre-acquisition HP such as severance, early retirement costs, costs of vacating duplicative facilities (leased or owned), contract termination costs, non-inventory asset impairment charges and other costs associated with exiting activities of pre-acquisition HP. These costs are accounted for under EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity" and have been included as a charge to the results of operations for the three- and nine-month periods ended July 31, 2002. HP recorded approximately $915 million of similar restructuring costs in connection with restructuring the pre-acquisition Compaq organization. These costs are accounted for under EITF 95-3, "Recognition of Liabilities in Connection with Purchase Business Combinations." These costs were recognized as a liability assumed in the purchase business combination and included in the allocation of the cost to acquire Compaq and, accordingly, have been included as an increase to goodwill. A portion of the restructuring liabilities are classified as long-term liabilities in the accompanying balance sheet.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 6: Restructuring Charges (Continued)

        The restructuring charges recorded in the third quarter are based on HP's restructuring plans that have been committed to by management. Changes to the estimates of executing the currently approved plans of restructuring the pre-acquisition Compaq organization will be recorded as an increase or decrease to goodwill and any changes to the estimated costs of restructuring the pre-acquisition HP organization will be reflected in HP's results of operations.

Acquisition-Related Restructuring Costs Expensed in Fiscal 2002

        The third quarter charge of $1.6 billion primarily to restructure the pre-acquisition HP organization consisted mainly of severance, early retirement and other employee benefits, non-inventory asset impairment charges, and other related restructuring activities. The severance, early retirement costs and other employee benefits related principally to the planned early retirement or termination of 8,200 employees worldwide across many regions, business functions and job classes. As of July 31, 2002, approximately 2,300 employees had retired or been terminated. Payments of approximately $219 million will be made through post-retirement and pension plans for retiring employees. Non-cash charges of approximately $64 million are primarily related to net pension and post-retirement settlement and curtailment losses. HP expects to pay the remaining balance of the severance accrual within the next fiscal year. Non-inventory asset impairment of $544 million primarily for goodwill and purchased intangibles was due to product roadmap decisions made in conjunction with the Compaq acquisition, which led to the elimination of substantially all of the middleware and storage virtualization offerings whose businesses were acquired in fiscal 2001. Other related restructuring charges consisted primarily of the cost of vacating duplicate facilities and the cost of exiting certain contractual obligations.

        As of July 31, 2002, the balance of the accrued restructuring charges recorded in conjunction with the restructuring of the pre-acquisition HP organization in the third quarter of fiscal 2002 consisted of the following:

Acquisition-Related Restructuring Costs Capitalized in Fiscal 2002 as a Cost of Acquisition

        The restructuring plans also included approximately $915 million incurred in connection with restructuring pre-acquisition Compaq that was recognized as a liability assumed in the purchase business combination and included in the allocation of the cost to acquire Compaq. This restructuring liability consisted primarily of severance, early retirement costs, other employee benefits, and other related restructuring activities which consisted primarily of costs of vacating duplicate facilities and the

19

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 6: Restructuring Charges (Continued)

cost of exiting certain contractual obligations. The severance and other employee benefits related to the planned early retirement and termination of 8,600 employees worldwide across many regions, business functions and job classes, as well as employee relocation costs. As of July 31, 2002, approximately 2,000 employees had retired or been terminated. HP expects to pay the remaining balance of severance and other employee benefits accrual within the next fiscal year.

        As of July 31, 2002, the balance of the accrued restructuring charges capitalized as a cost of acquisition in the third quarter of fiscal 2002 consisted of the following:

Fiscal 2001 plans

        In fiscal 2001, HP's management approved restructuring actions to respond to the global economic downturn and to improve HP's cost structure by streamlining operations and prioritizing resources in strategic areas of HP's business. HP recorded a restructuring charge of $384 million in fiscal 2001, including $102 million in the first nine months of the year, to reflect these actions. The fiscal 2001 charge consisted of severance and other employee benefits related to the planned termination of approximately 7,500 employees worldwide, across many regions, business functions and job classes, as well as costs related to the consolidation of excess facilities. HP recorded additional restructuring charges of $21 million in the nine-month period ended July 31, 2002 to reflect additional adjustments to the expected severance cost of its fiscal 2001 plans. As of July 31, 2002, substantially all of these employees were terminated and HP had paid out $388 million of the accrued costs. HP expects to pay out the remainder of the accrual during the last quarter of fiscal 2002.

        Additionally, as part of the acquisition of Compaq, HP acquired the remaining obligations of Compaq's existing restructuring plans, which were initially recorded in Compaq's fiscal 2001. The total obligation acquired in connection with these restructuring plans was $247 million at May 3, 2002. As of July 31, 2002, HP had paid out $26 million of the acquired accrued costs.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 6: Restructuring Charges (Continued)

        As of July 31, 2002, the balance of the fiscal 2001 accrued restructuring costs recorded consisted of the following:

Note 7: Inventory

Note 8: Investments

        At October 31, 2001, HP held a 49.5% equity interest in Liquidity Management Corporation ("LMC"), which was accounted for under the equity method of accounting. The remaining 50.5% of equity interest was held by a third party investor. On November 1, 2001, LMC redeemed the outstanding equity of the third party investor, leaving HP as the remaining shareholder of LMC. Accordingly, effective November 1, 2001, the assets, liabilities and results of operations of LMC have been included in HP's consolidated financial statements. At November 1, 2001, the assets of LMC consisted primarily of $879 million of cash and cash equivalents.

Note 9: Borrowings

        In May 2002, in connection with HP's acquisition of Compaq, all of the outstanding debt of Compaq has been consolidated into the financial results of HP. The face value of the Compaq debt consisted of $1.7 billion of commercial paper; $275 million of unsecured 7.45% Notes, which matured on August 1, 2002; $300 million of unsecured 7.65% Notes, which mature on August 1, 2005 (the "2005 Notes"); $300 million of unsecured 6.2% medium-term notes, which mature on May 15, 2003 (the "2003 Notes"); and $65 million of other debt (including debt issued by Digital Equipment Corporation), with interest rates ranging from 7.125% to 8.625%, which matures at various dates from

21

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 9: Borrowings (Continued)

October 15, 2002 through April 1, 2023. The 2003 Notes and 2005 Notes issued by Compaq have been guaranteed by HP. The entire balance of the Compaq commercial paper was paid off prior to July 31, 2002 and the 7.45% Notes matured as scheduled on August 1, 2002. The debt had an aggregate fair value of $2.7 billion on the acquisition date. In addition, as a result of the acquisition and associated ratings changes, approximately $250 million of long-term debt payable to CCF Charterhouse ("CCF") in February 2005 became subject to a put option whereby the debt became repayable at the option of CCF. As of July 31, 2002, this option had not been exercised.

        Effective March 15, 2002, HP replaced its $1.0 billion committed borrowing facility, which was due to expire in April 2002, with two senior unsecured credit facilities totaling $4.0 billion in borrowing capacity, including a $2.7 billion 364-day facility and a $1.3 billion three-year facility. Interest rates and other terms of borrowing under these lines of credit vary based on HP's external credit ratings. At July 31, 2002, there were no borrowings outstanding under the committed borrowing facilities.

        In February 2002, HP filed a shelf registration statement (the "2002 Shelf Registration Statement") with the SEC to register $3.0 billion of debt securities, common stock, preferred stock, depositary shares and warrants. The 2002 Shelf Registration Statement was declared effective in March 2002. In June 2002, HP offered under the 2002 Shelf Registration Statement $1.0 billion of unsecured 5.5% Global Notes, which mature on July 1, 2007 unless previously redeemed. Also, in June 2002, HP offered under the 2002 Shelf Registration Statement $500 million of unsecured 6.5% Global Notes, which mature on July 1, 2012 unless previously redeemed. HP may redeem some or all of either series of Global Notes at any time at redemption prices described in the prospectus supplement dated June 21, 2002. As of July 31, 2002, HP had capacity remaining to issue approximately $1.5 billion of securities under the 2002 Shelf Registration Statement.

        In December 2000, the Board of Directors authorized a repurchase program for HP's zero-coupon subordinated convertible notes due 2017. Under the repurchase program, HP may repurchase the notes from time to time at varying prices. HP did not repurchase any notes in the three-month period ended July 31, 2002. In the first nine months of fiscal 2002, HP repurchased $257 million in face value of the notes with a book value of $158 million for an aggregate purchase price of $127 million, resulting in an extraordinary gain on the early extinguishment of debt of $20 million (net of related taxes of $11 million). As of July 31, 2002, the notes had a remaining book value of $315 million.

        In February 2000, HP filed a shelf registration statement (the "2000 Shelf Registration Statement") with the SEC to register $3.0 billion of debt securities, common stock, preferred stock, depositary shares and warrants. The 2000 Shelf Registration Statement was declared effective in March 2000. In May 2001, HP filed a prospectus supplement to the 2000 Shelf Registration Statement, which allowed HP to offer from time to time Medium-Term Notes, Series A, due nine months or more from the date of issue, in addition to the other types of securities described above. In June 2000, HP offered under the 2000 Shelf Registration Statement $1.5 billion of unsecured 7.15% Global Notes, which mature on June 15, 2005 unless previously redeemed. In December 2001, HP offered under the 2000 Shelf Registration Statement $1.0 billion of unsecured 5.75% Global Notes, which mature on December 15, 2006 unless previously redeemed. HP may redeem some or all of the 7.15% Global Notes or the 5.75% Global Notes at any time at the redemption prices described in the prospectus supplements dated June 6, 2000 and December 3, 2001, respectively.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 9: Borrowings (Continued)

        HP has the ability to offer from time to time up to $3.0 billion of Medium-Term Notes under a Euro Medium-Term Note Programme filed with the Luxembourg Stock Exchange. These notes can be denominated in any currency including the euro. However, these notes have not been and will not be registered in the United States. In July 2001, 750 million euro (or $733 million based on the exchange rate at July 31, 2002) of 5.25% Medium-Term Notes maturing on July 5, 2006 were issued under this program. As of July 31, 2002, there was capacity remaining to issue approximately $2.3 billion of Medium-Term Notes under the program.

        HP also maintains various other short- and long-term borrowings, commercial paper and international lines of credit from a number of financial institutions and institutional investors with approximately $2.2 billion outstanding at July 31, 2002. HP occasionally repurchases its debt prior to maturity based upon its assessment of current market conditions and financing alternatives.

Note 10: Income Taxes

        Income tax provisions for interim periods are based on estimated effective annual tax rates. HP's effective tax rates differ from the U.S. federal statutory rate of 35% generally due to 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. The tax benefits in the three- and nine-month periods ended July 31, 2002 were primarily due to the operating losses in those periods. These benefits were partially offset in these periods by non-deductible charges for amortization of goodwill, IPR&D and certain other acquisition-related charges. The effective tax rate before extraordinary item was approximately 18.7% and 0% in the third quarter of fiscal 2002 and 2001, respectively, and approximately 12.9% and 9.8% in the first nine months of fiscal 2002 and 2001, respectively.

        HP recorded gross deferred tax assets of $4.5 billion and gross deferred tax liabilities of $2.3 billion upon the acquisition of Compaq. The gross deferred tax assets are composed primarily of net operating loss and tax credit carryforwards, capitalized research and development costs and other temporary differences. The gross deferred tax liabilities are composed primarily of provisions made on foreign earnings which are deemed to be distributed to the U.S. and timing differences related to purchased intangibles. The gross deferred tax assets were reduced by a valuation allowance of $774 million, principally composed of pre-acquisition tax loss carryforwards and credit carryforwards incurred by Compaq that management has determined are more likely than not to expire unused. If it is subsequently determined that a portion of the Compaq deferred tax asset to which the valuation allowance relates should be recognized, the tax benefit of such recognition will be allocated to goodwill or other noncurrent intangible assets acquired in the acquisition. U.S. tax loss carryforwards of $757 million expire in 2006. Foreign tax loss carryforwards totaling $643 million will expire between 2002 and 2009. An additional $725 million of foreign tax loss carryforwards have no expiration period. Tax loss carryforwards available in certain states will expire between 2006 and 2016. Credit carryforwards of $245 million will expire between 2002 and 2016. An additional $95 million of credit carryforwards have no expiration period. U.S. tax laws may limit the annual utilization of certain acquired tax loss and credit carryforwards. These limitations should not materially impact the utilization of the remaining tax loss and credit carryforwards.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 11: Stockholders' Equity

Stock Option Plans

        In connection with the acquisition of Compaq, HP assumed certain of Compaq's existing stock option plans. At July 31, 2002, a total of 50,171,794 shares remained available for future grant under the assumed plans. In July 2002, the Compensation Committee of the Board of Directors amended the assumed plans, in general, to conform their terms to the HP stock option plans. The plans were amended to exclude directors and certain officers from eligibility to receive option grants under the assumed plans and to restrict grants to only non-qualified options.

Repurchases of HP Common Stock

        HP repurchases shares of its common stock under a systematic program to manage the dilution created by shares issued under employee stock plans and a separate incremental plan. These plans authorize purchases in the open market or in private transactions. At October 31, 2001, HP had authorization for future repurchases of approximately $1.6 billion of common stock under the two programs. In the third quarter of fiscal 2002, HP repurchased 20,021,000 shares at an aggregate price of $342 million. In the first nine months of fiscal 2002, HP repurchased 29,423,000 shares for an aggregate price of $546 million. As of July 31, 2002, HP had remaining authorization for future repurchases under the two programs of approximately $1.1 billion. In fiscal 2001, HP repurchased 7,163,000 shares for an aggregate price of $200 million in the third quarter, and HP repurchased 32,466,600 shares for an aggregate price of $1.0 billion in the first nine months of the year.

Note 12: Comprehensive (Loss) Income

        Comprehensive (loss) income includes net earnings as well as other comprehensive income. HP's other comprehensive income consists of changes in unrealized gains and losses on available-for-sale securities, derivative instruments and currency translation adjustments. Comprehensive income, net of taxes, for the three- and nine-month periods ended July 31 was as follows:

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 12: Comprehensive (Loss) Income (Continued)

        The components of accumulated other comprehensive (loss) income, net of taxes, was as follows:

Note 13: Supplemental Cash Flow Information

Note 14: Segment Information

Description of Segments

        HP is a leading global provider of products, technologies, solutions and services to consumers and businesses. The company's offerings span IT infrastructure, personal computing and access devices, global services and imaging and printing.

        As of July 31, 2002, HP organized its operations into five businesses: the Imaging and Printing Group, the Personal Systems Group, the Enterprise Systems Group, HP Services and HP Financial Services. The segments were determined in accordance with how management views and evaluates HP's businesses. In the third quarter of 2002, HP made the strategic change to move the workstations business from the Enterprise Systems Group segment to the Personal Systems Group segment. In the first quarter of 2002, HP made strategic changes to move the personal computer ("PC") business from the Enterprise Systems Group segment to the Personal Systems Group segment and to move HP Financial Services from the HP Services segment to a separate operating segment. Segment financial data for the nine-month period ended July 31, 2002 and the three- and nine-month periods ended July 31, 2001 has been restated to reflect these organizational changes. The factors that management uses to identify HP's separate businesses include customer base, homogeneity of products, technology

25

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 14: Segment Information (Continued)

and delivery channels. A description of the types of products and services provided by each reportable segment is as follows:

•

Imaging and Printing Group provides printer hardware, digital imaging products, printer supplies, and related professional and consulting services. Printer hardware consists of business and home printing devices, which include color and monochrome printers for shared and personal use, multi-function laser and all-in-one inkjet devices, personal color copiers and faxes, wide- and large-format inkjet printers and digital presses. Digital imaging products include scanners and digital photography products. Supplies offer laser and inkjet printer cartridges and other related printing media. Professional and consulting services are provided to customers to optimize the use of printing and imaging assets.



•

Personal Systems Group provides commercial PCs, home PCs, workstations, a range of handheld computing devices, digital entertainment systems, calculators and other related accessories, software and services for commercial and consumer markets. Commercial PCs include the e-PC, Evo and Vectra desktop series, as well as Evo, Armada and Omnibook notebook PCs. Home PCs include the Pavilion and Presario series of multi-media consumer desktop PCs and notebook PCs. Workstations provide UNIX®, Windows and Linux-based systems. Handheld computing devices include the iPAQ and Jornada handheld products that run on Pocket PC® software. Digital entertainment systems offer the DVD+RW drives as well as digital entertainment center products. Post-Compaq acquisition product roadmap decisions include discontinuance of the Vectra desktop series and Jornada handheld products.



•

Enterprise Systems Group provides business critical servers, industry standard servers, storage and software solutions. Business critical servers include RISC-based servers running on the HP-UX operating system and the HP AlphaServer product line running on both Tru64 UNIX® and Open VMS. The various UNIX® server offerings range from low-end servers to high-end scalable servers, including the Superdome line. Additionally, HP offers its NonStop fault-tolerant server products, which deliver high levels of availability, performance, scale and manageability for business critical solutions. Industry standard servers offer primarily entry-level and mid-range NetServer and ProLiant servers, which run on the Windows, Linux and Novell operating systems. Storage provides entry-level, mid-range and enterprise array offerings, storage area networks, storage management software and virtualization technologies, as well as tape drives, tape libraries and optical archival storage. Software offers OpenView and other management and telecommunications software solutions designed primarily for large-scale systems and networks. These software solutions run on a variety of operating systems including Windows and multiple versions of UNIX®. Post-Compaq acquisition product roadmap decisions include discontinuance of the NetServer line.



•

HP Services provides a comprehensive, integrated portfolio of IT Services offerings, including: customer support, consulting and integration, and managed services. Customer support provides a range of services from standalone product support to high availability services for complex, global, networked, multi-vendor environments. Customer support also manages warranty support through its own service organization, as well as through full-service resellers and independent service companies. Consulting and integration provides services to design, build and integrate IT infrastructure. Consulting and integration also provides cross-industry solutions in areas such as

26

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 14: Segment Information (Continued)

customer relationship management, supply chain, e-commerce, business portals, messaging and security, as well as industry focused solutions for financial services, telecommunications, manufacturing and government. Managed services offers a range of IT management services, both comprehensive and selective, including transformational infrastructure services, client computing managed services, managed web services, application services, as well as business continuity and recovery services. Services teams with the leading software, networking and services companies to bring complete solutions to our customers.

•

HP Financial Services supports and enhances HP's global product and services solutions by providing a broad range of value-added financial services offerings that enable HP's customers worldwide to acquire complete IT solutions, including hardware, software and services. HP Financial Services offerings include lease and loan financing and computing and printing utility offerings, as well as financial asset management services for large global and enterprise customers. HP Financial Services also offers an array of specialized financial services to small and medium-sized businesses and educational and governmental customers. HP Financial Services offers innovative, customized and flexible alternatives to balance unique customer cash flow, technology obsolescence and capacity needs.

        Prior to 2002, HP's immaterial operating segments were aggregated to form an "All Other" category as they did not meet the materiality threshold for a reportable segment. This category included primarily the VeriFone business prior to its divestiture in the third quarter of 2001.

        The reportable segments disclosed in this Form 10-Q are based on HP's management organizational structure as of July 31, 2002. Future changes to this organizational structure may result in changes to the reportable segments disclosed.

Segment Revenue and Profit

        The accounting policies used to derive reportable segment results are generally the same as those described in Note 1. Intersegment net revenue and earnings from operations include transactions between segments that are intended to reflect an arm's length transfer at the best price available from comparable external customers and are primarily related to intercompany sales of products to HP Financial Services for leasing transactions.

        A significant portion of each segment's expenses arise from shared services and infrastructure that HP has historically allocated to the segments in order to realize economies of scale and to use resources efficiently. These expenses include costs of centralized research and development, legal, accounting, employee benefits, real estate, insurance services, information technology services, treasury and other corporate and infrastructure costs. In the first quarter of fiscal 2002, HP revised its allocation methodology for shared services and infrastructure. HP believes these allocation changes resulted in a better reflection of the utilization of services provided to or benefits received by the segments. Segment financial data for the three- and nine-month periods ended July 31, 2001 has been restated to reflect these changes.

27

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 14: Segment Information (Continued)

Segment Data

        The results of the reportable segments are derived directly from HP's management reporting system. The results are based on HP's method of internal reporting and are not necessarily in conformity with accounting principles generally accepted in the United States. Management measures the performance of each segment based on several metrics, including earnings from operations. These results are used, in part, to evaluate the performance of, and allocate resources to, each of the segments. Certain operating expenses, which are separately managed at the corporate level, are not allocated to segments. These unallocated costs include primarily acquisition-related charges, restructuring charges, charges for purchased IPR&D, amortization of goodwill and purchased intangibles and the amount by which profit-dependent bonus expenses and certain employee-related benefit program costs differ from a targeted level recorded by the segments.

        The table below presents selected financial information for each reportable segment: