## Discontinued Operations 

On March 2, 1999, hp announced its intention to launch a new company, subsequently named Agilent Technologies, Inc. (Agilent Technologies), through a distribution of Agilent Technologies common stock to hp’s stockholders in the form of a tax-free spin-off. Agilent Technologies is composed of hp’s former Measurement Organization, which included the test-and-measurement, semiconductor products, chemical analysis and healthcare solutions businesses. 

Effective July 31, 1999, hp’s management and Board of Directors completed the plan of disposition for Agilent Technologies. HP’s condensed consolidated financial statements for all periods present Agilent Technologies as a dis- continued business segment in accordance with Accounting Principles Board Opinion No. 30. 

In November 1999, Agilent Technologies completed an initial public offering of approximately 16% of its com- mon stock and distributed the net proceeds of approximately $2.1 billion to hp. HP provided initial funding in November 1999 to Agilent Technologies and retained certain assets and liabilities of Agilent Technologies as of November 1,1999, which were subsequently liquidated. The aggregate impact of these transactions resulted in cash flows from discontinued operations of approximately $1.0 billion and an increase in additional paid-in capital of approximately $1.3 billion. 

HP distributed substantially all of its remaining interest in Agilent Technologies through a stock dividend to hp stockholders on June 2, 2000, resulting in the elimination of the net assets of discontinued operations and a $4.2 billion reduction of retained earnings. The decrease in the intrinsic value of hp’s employee stock plans attributable to the distribution of Agilent Technologies was restored in accordance with the methodology set forth in the FASB Emerging Issues Task Force Issue 90-9, “Changes to Fixed Employee Stock Option Plans as a Result of Equity Restructuring.” 

In the second quarter of fiscal 2000, the cumulative net earnings of Agilent Technologies since the July 31,1999 measurement date began to exceed the total estimated net costs to effect the spin-off. Net earnings from discontinued operations for fiscal 2000 were $136 million. Of this $136 million, net earnings of Agilent Technologies for the period from July 31,1999 through the June 2, 2000 spin-off date totaled $287 million (net of related tax expense of $174 million), and the net costs to effect the spin-off were $151 million (net of related tax benefit of $23 mil- lion). Net earnings from discontinued operations for fiscal years 1999 and 1998 consisted only of the net earnings of Agilent Technologies. 

## Contingencies and Factors That Could Affect Future Results 

Contingencies. HP is involved in lawsuits, claims, investigations and proceedings, including patent, commercial and environmental matters, which arise in the ordinary course of business. There are no such matters pending that hp expects to be material in relation to its business, financial condition or results of operations. 

Factors That Could Affect Future Results. A substantial portion of hp’s revenues each year is generated from the development, manufacture and rapid release to market of high technology products newly introduced during the year. In the extremely competitive industry in which hp operates, product development, manufacturing and marketing are complex and uncertain processes requiring hp to accurately predict emerging technological trends and cus- tomers’ changing needs. Additionally, hp’s production strategy relies on its suppliers’ ability to deliver quality components and products in time to meet critical manufacturing and distribution schedules, and its sales strategy relies on the ability of third-party distributors to sell hp products to accommodate changing customer preferences. 

In light of these dependencies, failure to successfully manage a significant product introduction or the transition from existing products to new products, failure of suppliers to deliver as needed, or failure of resellers to remain cus- tomers and channel partners could have a severe near-term impact on hp’s revenue growth or results of operations. HP sells a significant portion of its products through third-party resellers and, as a result, maintains individually sig- nificant receivable balances with major distributors. If the financial condition or operations of these distributors deteriorate substantially, hp’s operating results could be adversely affected. Future results could also be affected by problems encountered with respect to intellectual property; international sales and operations; and acquisition, strategic alliance, joint venture and divestiture activities. 

This summary of factors that could affect future results should be read in conjunction with the section entitled “Factors That Could Affect Future Results” contained in hp’s Annual Report on Form 10-K for fiscal year 2000 accompanying the Notice of Annual Meeting and Proxy Statement for hp’s 2001 Annual Meeting of Shareowners. 

