Good day, ladies and gentlemen. Thank you for standing by, and welcome to your Hewlett Packard second quarter 2006 earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s conference, Mr. Brian Humphries. Please proceed, sir.

Thank you, Carlo, and good afternoon, everyone. I would like to welcome you to our second quarter earnings conference call. Joining me today is our CEO and President, Mark Hurd, and CFO Bob Wayman. Before we get started, I would like to remind you that this call is being webcast live. The webcast and the second quarter earnings slide presentation, including non-GAAP reconciliation tables, can be accessed on the HP Investor Relations page, under company information, at hp.com. A replay will also be available shortly after the conclusion of the call for approximately one year. Next, it is my duty to inform you that the primary purpose of this call is to provide you with information regarding the second quarter. However, some of our comments and responses to your questions may include forward-looking statements. These forward-looking statements are based on certain assumptions and are subject to a number of risks and uncertainties, and actual future results may vary materially. I encourage you to read the risk factors described in the company’s annual report on form 10K for the fiscal year ended October 31, 2005, the company’s quarterly report on form 10Q for the fiscal quarter ended January 31, 2006, as well as other SEC reports filed after that form 10K. I would also like to point out that earnings, gross margins, operating expenses, and similar items discussed at the company level are sometimes expressed on a non-GAAP basis and therefore have been adjusted to exclude certain items, including in process R&D, amortization of good will and purchased intangibles, restructuring charges, and net investment losses. The presentation of GAAP financial information for the present quarter and fiscal year to date, and a reconciliation of non-GAAP amounts to GAAP are included in the financial statement accompanying today’s earnings release, which is also available on the HP Investor Relations page, under company information, at hp.com. Finally, and with a view to allowing time for multiple questions, please refrain from asking multi-part questions or clarifications. With that, I will turn the call over to Mark Hurd.

Thanks, Brian. Good afternoon, and thank you for joining us. I am pleased with our second quarter results. We posted solid revenue growth. We controlled costs and expenses. We expanded margins, and we generated record cash flow. This was another solid quarter in a long-term plan, and while we clearly have more work to do, we are building a stronger, more competitive HP. Financial highlights of the quarter included revenue growth of 5% year over year, or 8% in constant currency. Operating margin expansion in key businesses with personal systems margins at 3.6%, image and printing margins at 15.5%, enterprise storage and servers margins are 7.5%, and HP service margins of 8.9%. Operating margin of 8%, up from 6.1% the prior year period. Non-GAAP EPS at $0.54, representing growth of 46% year over year, and cash flow from operations at $3.6 billion. During the quarter, we also made progress on key initiatives, including completing the comprehensive review of our Enterprise sales coverage model, with a goal to create more demand for HP products and services. This is an area where we can make more progress, and we are determined to strengthen our customer relationships, and in doing so, expect to gain a greater share of their IT budgets. We will do so by increasing the number of HP sales people calling on our largest global customers, which will benefit demand for HP, and for our channel partners. As part of this, we have already started to build out our sales force, both in the Enterprise segment and in the commercial printing market. This investment, which will take place over several quarters, will allow us to take better advantage of market opportunities by increasing the frequency in which we touch our customers and provide greater customer satisfaction. At the same time, 1600 positions were eliminated as part of our restructuring program that will improve our call structure and allow us to become more competitive. As you will recall, most of the reductions associated with our restructuring program are non-customer facing. Turning to the business segments, Imaging and Printing had a solid quarter, with revenue growth of 5% year over year, led by supplies growth of 10%. Commercial hardware growth of 4%. Consumer hardware revenue declined 8% from the prior year period. Segment operating profit was $1.04 billion, or 15.5% of revenue, reflecting gross margin expansion and expense discipline. Over the past year, we have taken steps to strengthen the financial and competitive position of IPG, through disciplined expense management, technology innovation, and targeted acquisitions. These actions have strengthened our core printing business where units have grown 8% over the past four quarters, and allowed us to enter and compete in adjacent markets, such as photo kiosks and the photocopier market. We continued to see solid momentum in our growth initiatives in the second quarter. Color laser unit shipments increased 38% year over year, and printer-based MFP shipments grew 44% as we continue to see demand exceed our expectations. HP Indigo press saw printed page volume growth of 42%, led by new product introductions. In terms of our core printing business, we shipped approximately 12 million units in the second quarter. Unit growth slowed to 3% year over year, given a tough comparable, and our continued focus on targeting unit growth in the areas of high supplies consumption. We do expect unit growth to accelerate in the second half as we drive more promotional activity. We will continue to focus on investing in growth and profitability going forward through our commitment to research and development, targeted share gains, and the building out of our commercial printing sales force. We continue to see 13% to 15% operating margin as appropriate for this business. Personal systems continued to post solid results, with revenue up 10% year over year to $7 billion. During the quarter, shipments grew 16% over the prior year period with double-digit unit growth in our consumer and our commercial businesses, and in every region. Market growth continues to be led by the shift to mobility, strength in emerging markets, and consumers. These secular trends are clearly playing to our strengths, and in the second quarter we grew notebook shipments 48% year over year. We also saw strength in our consumer business, with shipments up 30% over the prior year period. The momentum is showing up in market share results. In the first calendar quarter, and according to preliminary estimates, HP gained 1.4 percentage points of share year over year on a worldwide basis, and 2 percentage points in the United States. We continue to post solid margin expansion in personal systems, with second quarter operating profit of $248 million, or 3.6% of revenue, up from 2.3% in the prior year period. Given our focus on reducing our cost structure, coupled with our strength in notebooks, strong international presence and consumer presence, we are confident we can continue to show the appropriate balance between revenue growth and operating margins. However, I will ask you to bear in mind that the third fiscal quarter is our seasonally weakest quarter in personal systems. Enterprise storage and server revenue grew 2% year over year to $4.3 billion. Within ESS, industry standard server revenue grew 4%, with strong growth in blades, where revenue increased 60%. Revenue in storage grew 8%, with ongoing strength and external arrays, where revenue in our high-end XP and mid-range EVA offerings grew 8% and 46% respectively. Business critical systems revenue decreased 7% year over year, with Integrity server revenue growth up 93%, offset by revenue declines in PA risk and Alpha. Enterprise storage and servers posted a strong second quarter operating margin of $322 million, or 7.5% of revenue, up from 4.3% in the prior year period, led by margin expansion and disciplined expenses. We have been focused on driving margin expansion in Enterprise storage and server and we are pleased with the progress we have made. However, we need to do a better job driving growth, and you will see us take actions in the form of pricing and go to market initiatives. As part of this effort, we are currently reviewing our Enterprise sales model to better understand our sales account coverage and deployment. We have room for improvement, and you will see us adding more resources in our large accounts to ensure better coverage and to serve our customers better. Revenue in HP services declined 2% year over year to $3.9 billion, reflecting the impact of currency and a focus on profitability improvements. Excluding the effects of currency, revenue in HP services grew 2% year over year. Within HPS, and on a year over year dollar basis, revenue grew 2% in managed services and declined 4% and 2% in technology services and consulting and integration, respectively. HPS reported operating profit of $345 million, or 8.9% of revenue, up from 7.3% in the prior year period, reflecting margin expansion and expense discipline. We saw margin expansion in all businesses within HP services, and I am pleased with the continued progress we are making in managed services and in consulting and integration margins. We remain focused on driving operational improvements in the business. As we head to the second half of fiscal year ’06, we will continue to focus on reducing our costs via labor management and efficiency measures, as well as process standardization and automation. This cost structure discipline and margin expansion will allow us to be more competitive in the market in fiscal year ’07, and you should expect to see a pick up in revenue growth rates in ’07. Revenue in software grew 20% over the prior year period to $330 million, with revenue in HP OpenView and HP OpenCall increasing 25% and 11% respectively. HP OpenView growth was fuelled by solid momentum in the business associated with Peregrine acquisition, which adds key assets and service management components to the HP OpenView portfolio. Software reported an operating profit of $3 million, or 1% of revenue. Although I am pleased that we got off to a good start with the Peregrine integration, and that it is our third consecutive quarter of profitability, we have to improve on operating performance. Software is strategic for HP and we are focused on driving margin expansion to levels more consistent with the profile and the size of this business. I am going to leave my segment comments at that for today. With that, I would like to turn it over to Bob.

Thanks, Mark, and good afternoon, everyone. Let me begin with a review of the performance of our financial services business. Revenue for HPFS during the quarter was $518 million, down 5% year over year and up 4% sequentially. The year over year revenue decrease reflects lower used equipment sales and declining financing volume, which decreased 14% year over year and 7% sequentially. Portfolio assets increased 1% year over year and sequentially. Operating margin was 7.5%, down from 10.7% in Q2 of last year, and 7.7% in Q1. Bear in mind that operating profit last year was aided by the reversal of approximately $16 million of reserves relating to certain aged receivables. We are focused on re-accelerating volume and revenue growth by making appropriate investments in our financing sales force, while continuing to balance the risk profile of the portfolio, which remains in very good shape. Before getting into the key elements of the P&L, let me remind you that fiscal 2005 results, including cost of sales, operating expenses, operating profit, net income, and EPS, did not include the impact of FAS 123R stock-based compensation. Consistent with last quarter, to assist you in comparing results versus prior periods, we have included a quarterly historical EPS trend in the financial tables accompanying the earnings release. This should allow you to view the results as though all stock-based compensation had been included in previously recorded results. Non-GAAP EPS for the quarter was $0.54, including approximately $0.03 from stock-based compensation, up from $0.37 a year ago, which again, excluded the impact of FAS 123R. GAAP EPS for the quarter was $0.51, which included $97 million, or $0.03 in after tax adjustments that were not included in our non-GAAP results. The majority of the adjustments relates to the amortization of purchased intangibles. A quick update on restructuring. During the quarter, approximately 1600 positions were eliminated, related to the July announcement, bringing the cumulative total to about 8100. Revenue of $22.6 billion for the quarter was up 5% year over year, and up 8% when adjusted for the effects of currency. On a regional basis, revenue was up 10% in the Americas, down 2% in EMEA, and up 7% in Asia Pacific. When adjusted for the effects of currency, revenue was up 9% in the Americas, 6% in EMEA, and 10% in Asia-Pacific. Gross profit was $5.6 billion for the quarter, or 24.8% of revenue, up from 23.8% a year ago and 23.2% in Q1. Gross margin improved year over year and sequentially in each of our non-financing business segments, reflecting improved operational effectiveness in key areas, such as option attach, delivery efficiency, utilization, and discounting. Non-GAAP operating expense totaled $3.8 billion for the quarter, or 16.8% of revenue, down from 17.7% a year ago and up from 15.7% sequentially, reflecting normal seasonality and the implementation of our annual salary adjustment, effective February 1, versus prior year implementations on May 1. Adjusting for currency, expenses were up 1% year over year and 6% sequentially. The year over year cost of currency increase reflects employee bonus accruals this quarter, given the improved financial performance of the company, as well as the accelerated effective date of salary increases. Non-GAAP operating profit was $1.8 billion, or 8.0% of revenue, up $478 million year over year and $92 million sequentially, despite the inclusion of approximately $120 million of stock-based compensation in the current period. Non-GAAP other income and expense, plus pre-tax income of $157 million, or roughly $0.04 per share after tax, above the $0.02 per share we had estimated coming into the quarter. The excess reflects significant currency gains during the quarter, but following significant currency losses in the prior quarter. OI&E primarily consists of net interest income, which is somewhat predictable in nature, currency impacts, which are more volatile, and one-time items such as gains or losses on land and building sales, which are difficult to predict. Given projected cash and debt levels, and our expectations for currency, we estimate non-GAAP OI&E to be about $0.03 to $0.04 per share per quarter for the remainder of FY06, which primarily reflects baseline net interest income. We will call out deviations from this baseline as appropriate. Our non-GAAP tax rate of 20.5% for the quarter, slightly above the guided number of 20%. Going forward, we expect a non-GAAP tax rate of 20% for the remainder of FY06. Next, the balance sheet. HP owned inventory came in at $6.8 billion, up $304 million year over year and $47 million sequentially. Inventory days of supply stands at 36 days, up from 35 days last year and sequentially. We will continue to actively manage inventory and are comfortable with the current levels across each of the businesses. Regarding channel inventory, we continue to be pleased with management of channel inventory in all of our businesses in both weeks and dollars. ESS and PSG ended the quarter at roughly four weeks, and IPG at five weeks, while channel inventory dollars were at appropriate levels across the board. Trade receivables ended the quarter at $9.8 billion, up $517 million year over year and $1.1 billion sequentially, in line with normal seasonality. DSO now stands at 39 days, flat year over year and up from 34 days sequentially. Next, property plant equipment was down $318 million year over year, and essentially flat sequentially at $6.4 billion. Gross CapEx was $521 million, down 8% year over year and up 22% sequentially. On a net basis, CapEx was $401 million dollars, up 6% year over year and 25% sequentially. Net PP&E, as a percentage of revenue, now stands at 7.2%, down from 8.0% year over year and flat sequentially. Coming into FY06, we expected full-year gross capital expenditures of $2.8 billion, and net CapEx of $2.2 billion. We assumed CapEx would be heavily weighted to the second half of the year. We remain roughly on track with capital spending in IT in our product segments. However, given the slowdown in financing volumes within HPFS, earlier capital expenditures may be somewhat less than our initial expectations. Regarding accounts payable, days payable closed the quarter at 53 days, up from 47 days year over year and 46 days sequentially. Next, a few comments on cash. Cash flow from operations was excellent, at a record $3.6 billion for the quarter. Free cash flow, that is operating cash flow less net CapEx, was $3.2 billion, up 62% over last year. Year-to-date cash flow from operations is very strong at $5.5 billion, up 39% year over year, and free cash flow was $4.8 billion, up 52% year over year. During the quarter, we repurchased $1.3 billion in stock and paid $226 million for our normal dividend. In addition to our open market share repurchases of approximately 40 million shares, we received approximately 7 million shares under the prepaid variable share repurchase program that we entered into last quarter. So a total of 47 million shares were acquired during the quarter. We closed the quarter with total gross cash of $14.1 billion, down from $14.5 billion year over year, and up from $12.0 billion sequentially. On to weighted average shares outstanding, our weighted average shares outstanding declined slightly to 2.887 billion from 2.893 billion in Q1. Going forward, we expect weighted average shares outstanding to remain roughly flat, with potential increases or decreases dependent on our continuing share repurchase activities, HP stock price, option exercise patterns, and common stock equivalents. Now a few comments on our outlook. On a constant currency basis, revenue typically declines approximately 4% to 4.5% from Q2 to Q3. In recent years, we have been negatively impacted by currency from Q2 to Q3. Assuming exchange rates stay roughly where they are today, and taking into consideration our hedging strategies, we expect revenue to benefit from currency somewhat sequentially. However, given the rate used in Q3 of ’05, and the heavy contracts that we have entered into, we do not expect a significant year over year currency benefit in Q3. In addition to currency movements and seasonality, our guidance takes into consideration the current competitive environment, which contains some uncertainty, particularly related to pricing dynamics. Taking all of these factors into account, we estimate Q3 ’06 revenue to be approximately $21.75 billion, and full year FY06 revenue to be approximately $91.0 billion, in line with current consensus analysts’ expectations. Regarding earnings, our results this quarter reflected good operational effectiveness and progress on several key initiatives. Offsetting this, let me remind you that Q3, as you know, is always a tough quarter for us. Our mix includes a significant portion of revenue from Europe, as well as the consumer segment, both of which are seasonally weak in the third quarter. Further, as Mark indicated, we will continue to fund investments to drive long-term growth initiatives, which include building out our Enterprise sales force both in the Enterprise segment and in the commercial printing market. The process of selecting, hiring, and deploying these resources will take time, and the associated costs will ramp accordingly. As such, for FY06, we expect these investments to impact Q4 more heavily than Q3. With that in mind, we now expect Q3 ’06 non-GAAP EPS of $0.45 to $0.48, which includes approximately $0.03 of stock-based compensation. For total year FY06, we expect non-GAAP EPS of $2.04 to $2.08, which includes approximately $0.13 of stock-based compensation. With that, we will take you questions.

Thank you, sir. (Operator Instructions) Our first question is from the line of Benjamin Reitzes with UBS Warburg.

Good afternoon. Thanks a lot. I wanted to ask about pricing, Mark. What is in your guidance and thinking for pricing with regard to the PC market, as well as what you said about the Enterprise market, that you are going to make some pricing investments. In particular, you know we are all thinking about what Dell may do or may not do, and if you could make a comment on that particular situation, we would appreciate it as well.

Sure, I will give you the best I can. I mean, we -- first of all, let me make a statement. We are very focused on running a good business. Share for us is, while important, it is not the primary driver of how we think about the business, so we really do think about the business in the context of the improvement in overall profitability and our ability to be able to deliver great products and great services while we do it. We have seen continued aggression, so I do not think Q2 was much different than what we have seen over past several quarters in terms of aggressive price points, so we factored that into the model that we have given you in terms of Q3 guidance. So the best I can tell you is in our Q3 guidance, both in the context of ISS and in the PC market is, our best view, where we have seen the market not only in Q2 but where we sit it in Q3, and given our emphasis as I described.

Have you seen the market get more aggressive as we went throughout the quarter, or you thought it was pretty steady?

The only difference I would say, Ben, is that it has just always been aggressive. I hate to give you that answer, but it was an aggressive market in Q2, and we expect it to continue to be. So if your question is did I see an accentuation point at the tail end or somewhere in there, no, I did not see that, but I do not want you to take that as meaning -- this is an aggressive marketplace, and it has been aggressive for a while.

Thank you, Ben. Next question, please.

Sir, our next question is from the line of Rich Farmer with Merrill Lynch.

Thank you. Mark or Bob, on the restructuring progress, last quarter, I think you said you were about 40% of the way through the restructuring. If I heard you correctly, Bob, you said 8100 positions, I guess against the target of 15,300. That implies around 53%. Is that the right way to think about it? In other words, how much of the restructuring is complete in terms of the actions as well as the flow-through to the P&L? Given, Mark, that you are already at your previous long-term margin target at 8% here, does that not suggest that the margin targets need to go up?

Let me start with the restructuring. Yes, your understanding is approximately correct. I would only remind you that it is very much affected by the geographic mix of people and all of that, so you cannot just take the number of headcount and come up with the right answer. Let me remind you that our overall cost savings included the benefit plan changes, which are already fully reflected now in our run-rate in Q2. So that part is fully behind us. We are 53% done with the headcount reductions. So there is still some work to go.

Yes, and a majority of that is in Europe, and as Bob’s point, some of the early parts of the savings came in the early part of the year with the pension cuts as he described. On the model, I gave you my Q3 and back-half of the year, and we will have to see how the rest of the year goes and how things unfold. Clearly we still have a lot of work to do here, Richard. I mean, you have mentioned it just in your statements. We have part of our restructuring left to do. We have hiring to do as it relates to our ability to be able to cover the accounts in the market the way we would like to be able to grow our revenue over time. So I think before we go delivering any new models, let’s get through Q3 and Q4 and see where we land.

Q2 is just one quarter. It is not the full year, so we gave you ’07 guidance. We were talking about full-year guidance, which takes into account weaker quarters like we seasonally expect in Q3.

One last one on Q3, when you look back over history here, Q3 is not a strong quarter for Hewlett Packard. So let’s get through Q3 as we have described and we will talk about the ’07 after that.

Thank you, Richard. Next question, please, Operator.

Sir, our next question is from the line of Richard Gardner with Citigroup.

Thank you. I was wondering if you might be able to provide any additional detail on the impact, the headcount impact of the ramp-up of the commercial sales force. In other words, how many people are you planning on hiring and over what time frame? Are there any other changes in the coverage model that you intend to make? Thank you.

Sure. I will try to give you some color. I am not going to give you numbers, other than to say I feel that we are under-covered, and it is not under-covered to the tune of 25 to 30 people, or I would not bring it up. For us, it is a significant movement and it requires -- I will tell you it is in the hundreds that we need to hire. We will hire as quickly as we can, but I would only remind you that it is in the context of we need quality people, people that can do the job, that have experience in this area. So as a result, it is not as simple as us just going out and putting a sign out or putting an ad out and hiring people. So we are going to go do the hard work to make sure we hire quality people and attract the best people in the industry. It is also important for us to assimilate them and to train them, so for a period of time, we not only will bear the expense, we will not have gross margin from them as they get productive, and that can take, in some cases, six, nine, ten months once they get hired. So again, we have factored that into the guidance that we have given you for Q3 and Q4, which we would expect to have some of that headcount in place with frankly no productivity from that headcount.

Thank you, Richard. Next question, please.

Sir, our next question is from the line of Rebecca Runkle with Morgan Stanley.

Good afternoon, thank you. Just a quick clarification, if I could, Mark, on software. If I recall, you were looking for continued improvement quarter to quarter in the software returns. You alluded to some of what happened in the quarter, but I am hoping that you could provide a little bit more context and clarity, and then what specifically you are doing, if anything, in addition to what you have already laid out, to get that to ramp the way you would like to see it?

Sure. Thanks, Rebecca. Well, we need to get the break-even point down, so real simple -- the break-even point here at 327 is not acceptable in terms of a break-even point. For us in the quarter, there were a couple of factors that occurred. There was a mix factor that occurred, in terms of more OpenCall as it related to OpenView, which had some mix impact on margins. We certainly had to take into consideration some of the expenses associated with the Peregrine acquisition. Both of those things, if you will, raised our break-even point. For us, Rebecca, this business is more important than a $1.3 billion software business. It is strategic to us in many dimensions and strategic to us financially, from a growth perspective and the way it aligns with the rest of our business. We are going to go get this business performing the way it should. I think you should expect to see us continue to drive on operational improvements in software.

Thank you, Rebecca. Next question, please.

Sir, our next question is from the line of Andrew Neff with Bear Stearns.

Thank you. Could you go into a little more detail about what is going on in Europe? That has been an historical area of strength. Even if you take out currency, it was underperforming to the other regions. Could you talk us through what you are doing there and how you plan to address some of the issues in Europe? And maybe just a general comment about demand trends in different geographic markets?

Sure. I would be glad to take a little bit. Bob can add some color to it if he would like. It is a mixed bag, Andy, would be the way I would describe it. There is good growth in Eastern Europe. So when you go into the Eastern Europe segments, you would see growth that you would feel very good about it. Clearly our growth in areas like Russia and other places has been strong. When you go look at it on a dollar basis, our growth in traditional western European countries has not been exciting. It has been flattish kinds of numbers, and the numbers differ a little bit by country. Now, when you get into a constant currency basis, all those numbers go up a bit, obviously, because we have affected several points of currency. I would describe it as Eastern Europe, pretty healthy, Western Europe, pretty blah. Certainly some effect on currency affected. They are not any different, Andy, than I feel about the rest of the company. As good as we are in Europe and as big as we are in Europe, and as important a player as we are over there, we are under-covered in Europe as well. We just have work to do, as we do across the rest of the company.

Thanks, Andy. Next question, please.

Sir, our next question is from the line of Tony Sacconaghi with Sanford Bernstein.

Thank you. Your revenue guidance for next quarter is about 4.8% year over year revenue growth. I know you said you would not get much benefit from currency, but even if you got a little, you are really guiding to 4% to 4.5% revenue growth versus the nearly 8% that you did this quarter on a year over year basis. Can you help explain what went into that? You mentioned a little bit of caution about what might happen on the pricing side in PC's. Is there anything else that is -- and again, this is year over year, so there is nothing to do with sequential seasonal patterns -- is there anything else that you are cautious about? Was there anything about the linearity in the quarter or what you were seeing in the Enterprise business that appears to be making your guidance somewhat conservative? Quite frankly, even for the year, currency has flipped around pretty nicely, and yet you retained the revenue guidance for the full year, despite the fact that currency has become much more favorable.

The guidance that we have given, Tony, is right in the middle of the 4% to 6% kind of range that we have provided for the overall company. There was no particular trend within Q2. That is to say, we did not see any change in trend in the month of April. There are just, in general, reasons to be cautious. We just heard a question about Europe and the weakness there. We had a lot of comment around what some of our competitors are talking about. So we think it is prudent to set a number that we feel solidly about.

Tony, we hope we do better. We will be clear with you on that, but when we look at what is out there -- first of all, at least for a part of Q3, we are not going to get much benefit from currency, given our hedging strategies. Some of it also is, take the euro, for example -- where is it going to land? We do not have a crystal ball on that either. I think we will see where we land. We think we are right in the middle. We have been saying we want to grow the company in the range that we have described. We think we are right in the middle of that guidance with what we are given here today.

Thanks, Tony. Next question, please.

Sir, our next question is from the line of Bill Shope with JP Morgan Chase.

Thank you. Your printing margins have broken out of your targeted range now. I think earlier in the call you said you planned to increase promotional activity to stimulate unit growth in the second half of the year. Should we assume that this means you are going to try and reinvest some of the upside versus your targeted range of 13% to 15%, to reinvigorate the install base?

We have had 8% unit growth over the past rolling four quarters. I think again our strategy is to target high usage segments for that unit growth, so you should think of us continuing to try to operate in that range of 13% to 15%. Looking to reinvest is appropriate, again to stimulate the install base, especially in the appropriate segments. We are not trying to lead a pricing war or anything like that. We are just trying to make sure we target the right segments. I think at the same time, you have seen the benefits of that in what has shown up over the past couple quarters. I would tell you that the IPG story is kind of a multi-prong story. I mean, the work that has been done in transformation of the business from a cost and expense perspective has been good work, done over the past several quarters. Certainly what we have done at the rest of the company has helped, and certainly our unit growth has helped over the past rolling four quarters. We think we will continue that. We think we will see accelerating unit growth which will have some effect on margins as we go, and we think we are roughly doing what we told you we would do.

Your promotional activity will not change from a prior action?

It will depend on the market and depend on the segment. Again, we will obviously monitor demand and monitor pricing as we go. I think you should expect us to be well-positioned, certainly in those high use segments, but I would not call anything we are going to do extraordinary, at least with our current plans.

Thanks, Bill. Next question, please.

Sir, our next question is from the line of Laura Conigliaro with Goldman Sachs.

Thank you. With Intel recently indicating that everything is on the table for review, how confident are you that Itanium will ultimately not end up on the cutting board? What, if anything, is plan B should Intel actually put an end date to its Itanium involvement?

I have no indication, nor do I want to speculate on anything like that, Laura. I think we have had no indication of Intel -- in fact, I think the last big Itanium discussion we had was Paul Otellini and I out in the marketplace, talking about the investments we are making together in the Itanium eco-system, both across Intel and Hewlett-Packard. We continue to try and grow our Integrity server line. I think the best medicine for any of that is for us to go out in the marketplace and scale the business and grow it.

Thanks, Laura. Next question, please.

Sir, our next question is from the line of Harry Blount with Lehman Brothers.

Quick strategic question -- the number one issue that I consistently hear from investors is can HP continue the momentum on the revenue growth side of the equation once we get past some of the cost-cutting. Mark, you have alluded to increasing the coverage. But as I take a look at the software and services business, could you potentially comment on some of the other levers that you are looking at pulling on the revenue growth side, broadly, and then a little bit more detail specifically on the software and services?

Sure. Frankly, the levers kind of integrate, Harry. For us, we really work on optimizing our cost, and taking cost out of other things and putting in things that help us grow. So we are doing a lot of work, as you know, in areas like IT and areas of corporate overhead, and realigning those dollars into areas that can help us grow the company. Certainly sales coverage is a part of that. We think there is a lot of market uncovered. I have given you kind of the cost side of going out and building that out, but the opportunity for us is significant, if we are successful over the long term in being able to drive more market share. I think that market share, when you have our situation -- just to be very open with you, sales as a discipline is not the hallmark of the company. We are an engineering-driven company, and we are very good at it. We build great technology at Hewlett Packard, and we just have to build the same kind of discipline and capability in our Enterprise sales capability and go to market model that we have in that other aspect of the company. I think we will be able to go do that, and I do think that effects growth. At the same time, when you talk about services, there is a direct correlation between services, cost, and leverage, the integration of software, automation of processes, and our ability to scale out our services business. Back to my point earlier, if you have too much cost, you cannot compete for multi-year transactions. You have to get your cost structure in line because you get it multiplied when you have a flaw in your cost model. It gets multiplied multiple times over multiple years. For us, it is very important to get our corporate cost right and to get our cost within services right. One of the ways to do that is to automate processes, which is what we are doing through our integration of OpenView into our service delivery process. That puts us in a better strategic position to go grow the company. Harry, the way you should think about it is us trying to get our cost right to be able to continue to invest in unit and commercial printer market share, to get our sales force right both in commercial printing and in the Enterprise sales growth discussions that we described earlier, to continue to drive on getting our services business lined up, even from a cost perspective and automation perspective, so we can go to the marketplace and grow. We are focused equally on getting our cost right and growing the company.

Thanks, Harry. Next question, please.

Sir, our next question is from the line of Shannon Cross with Cross Research.

I just wanted to ask a question about the cash flow. It is obvious that it is strong this quarter. How should we think about cash flow as we go through the remainder of the year? Also, that segues into, obviously, use of cash questions. Share repurchase dividends are already there. Any thoughts on more acquisitions? Thank you.

In terms of the rest of the year, there is not a lot that we expect to be different from the first half to the second, other than, as I indicated, capital spending will be a little back-end loaded. If you are looking at free cash flow, we would expect a little uptick in capital spending. Frankly, all of the working capital measures that we are looking at right now seem to be in line with where we want them. I do not expect huge changes as we move into the second half.

To your question on the use of our cash, I think you hit the right levers. Obviously we have been and we will continue to be active in the repurchase of HP shares. We will continue to look for acquisitions that are strategically aligned with where we want to take the company. You have seen us make acquisitions in storage and in services and in blades over the past several quarters, in IPG. We will continue to look in those areas for things that make sense for us. Again, we are not going to go after an acquisition just to spend money. It is going to have to be an acquisition that aligns to where we want to take the company strategically.

Okay, Shannon, thank you. Next question, please.

Sir, our next question is from the line of Cindy Shaw with Moors & Cabot.

Thank you. I would like to go back to the topic of revenue growth. It has been much better in the last two quarters than we had seen for a number of years before-hand. Mark, you laid out in the December analyst meeting, a number of basically tactics and strategies for doing that. Is that kicking in already, or have we got other elements that are helping the revenue growth in the last six months?

Cindy, as I indicated, I think what you have seen is good work in terms of our ability to align our costs and our ability to go put that into the market and have it work for us. Certainly you have seen that in our unit growth and in IPG. You have seen it show up in PSG, to a degree. We have work to do in the Enterprise sales force. This not only hits PSG but also hits IPG. For us, we need to be able to do a better job in those accounts from a coverage perspective. I would say, as I mentioned in my comments earlier, some of that work has not kicked in, and that is work that we have to do to be able to go source and hire, assimilate, and train the people. I would say we are pulling some of the levers. I would actually argue some of those levers we are pulling quite well. We have to make sure we are pulling all of them as we look forward into the future.

So is it fair to say the mobility plan is going pretty well for you then?

I think you saw our strength in notebooks in the quarter was good. Certainly when you are up 48% when you look at the units, those are big numbers. Particularly, it is not like we are growing off a small base, either. I think even in IPG, while I wish we had a little bit more unit growth, we certainly were coming off one of our strongest quarters a year ago. I think we were like 12% unit growth prior year. Again, to your point, it is very important for us to get our cost right so we stay as competitive in the marketplace as we can. We also have to get the sales force thing going our way. That is going to take us some time to get that right, but I am confident we have a shot.

Thanks, Cindy. Next question, please.

Sir, our next question is from the line of Bill Fearnley with FTN Midwest Securities.

Mark, a quick question for you regarding the channel. When you talk about increasing the sales staff, should we expect a change in the direct and indirect sales mix? Does your view change as you look at GEO’s? Does your view of the channel change here as you cross your one-year anniversary at Hewlett?

That was one of Brian's rules, to not ask a multi-part question, but I will do my best to deal with that. I think the channel is a key asset for us. I think they are in a lot of places that we cannot get to. They give us a lot of support. We have all kinds of different channel partners across different segments across different geographies, so it is hard to generalize about them. But if I were to generalize, I would call them an asset. Has my view changed since I got here? Not really. We are continuing to try and align our channel compensation to channel performance. We believe that to be working, and feel good about our alignment in that respect. Should you take any of my comments in terms of the building out of the direct Enterprise sales force as some message to the channel? No. I think the message you should take to the channel is we are going to go create demand for Hewlett Packard, and that is going to be an opportunity for our channel partners to get more demand at the same time. We are not making a fulfillment directive by what we are doing with our folks. They are going out to create more demand for HP and that is going to benefit the channel as much as it is going to benefit any of our direct functions.

Thank you, Bill. Next question, please.

Sir, our next question is from the line of Chris Whitmore with Deutsche Bank.

Good afternoon. Couple questions, hoping first of all to get more color on the deceleration in unit shipments and the printer space. Is that a broad based market phenomena, etc.? Tied to that, I was a little surprised to see inventory increase sequentially entering the summer slowdown. Could you give us any color on the inventory on your balance sheet? Thanks.

Let me start with inventory. We feel very good about the inventory position. We did increase what we call our strategic inventory, our strategic buys in PSG. This is focused on areas where we want to assure supply at good prices. So there is a bit of an uptick that is not seasonal in nature, but that is really the only area of inventory that is going a little differently than what one would normally model.

To Bob’s point, you are going to see us -- where we think it makes sense -- do spot buys like Bob described, but I would not take that as some other kind of inventory message at all. In IPG, I think the question is a bit more complicated, and without trying to get into a ton of detail on this call, we are targeting high usage segments, so we give you an overall unit growth number as opposed to a unit growth number by segment. Take my comments to mean I am pretty pleased with what IPG did in the quarter from a unit growth perspective. I would have liked to have seen more unit growth, but I would not interpolate totally the three, because there is some low usage segments that we frankly do not get as aggressive in, depending on what is going on in the marketplace. Again let me message one more time -- we do expect accelerated unit growth in the back-half of the year in IPG.

We will take one more question, please.

Sir, that question is from the line of Keith Bachman with Banc of America.

Hello, just under the wire. [inaudible] to be talking a bit about the…

Keith, I am afraid we can barely hear you. Could you speak up, please?

Yes, can you hear me now, Bob?

Much better, thank you.

I was hoping you could talk a little bit more about the PC dynamics in terms of trying to separate out some of the opportunities or revenue growth that you had in the quarter from the U.S. versus the international market, and how, if any, the pricing dynamics differed there, because again, this actually relates back to Dell. I am just trying to understand what the future may hold here if Dell gets more aggressive on pricing.

You know, the best way I can describe it, Keith, is it was pretty balanced overall. It is pretty balanced overall -- that is the best I can give you. I cannot come up with a tremendous difference in geography. As I mentioned in my prepared comments, we had strong growth across really all geographies, and that is the way we saw it.

If you look at ASP's for personal systems, overall year over year we saw a 5% decline in ASP's, which is really very similar to what we saw in Q1. So there is just no news there. If you look at it by region, I am not going to give you the exact details, but there is not much deviation around that 5% by region.

There is just not much there, Keith. I mean, we had double-digit unit growth in every region. That is about all I can give you on it.

Okay. Bob, is there any color you can give us on what the spot-buy was? What was that product?

It was in a few areas, but the largest once again was in panels.

Thank you, Keith. Thank you very much. I appreciate all of your questions. Before wrapping up, I want to summarize today’s call by again saying I am pleased with HP's second quarter results. We posted solid revenue growth. We controlled cost and expenses, expanded margins and generated strong cash flow. The quarter represented another solid quarter in a multi-year plan. While we clearly have more work to do, and we know that, we are well on our way to building a stronger, more competitive HP. While we have to get after that work, I think we will continue to align our expenses and continue to optimize our investments in growth, we are encouraged with our progress to date. I will leave my comments at that, and again, thanks for joining us for the call.

Ladies and gentlemen, we thank you for your participation in today’s conference with HP. This concludes your presentation and you my now disconnect.